UNDERSTANDING TERMS OF ART IN REAL ESTATE TRANSACTIONS

Timothy Kennedy, Vincent Dagenais Gibson LLP/s.r.l. Jeffrey Lem, Miller Thomson LLP

Nov. 1, 2011

SUPPLEMENTAL MATERIALS FOR JEFFREY W. LEM

21 R.P.R. (3d) 38

Understanding Goodyear: A Case Commentary on Goodyear Canada Inc. v. Burnhamthorpe Square Inc.

Jeffrey W. Lem Miller Thomson, LLP

Introduction

Few recent cases have engendered as much academic and industry interest as the recent trial and appellate decisions in Goodyear Canada Inc. v. Burnhamthorpe Square Inc.[FN1] Reduced to their absolutely barest essentials, the decisions (both at trial and in appeal) permitted a tenant to be freed from its long term lease once a prior-ranking mortgagee took possession of the property. The trial decision of Mr. Justice Ground was released in April 1997, and the parties sought an expedited trip to the Court of Appeal. The Court of Appeal's decision, delivered by Madam Justice McKinlay, was released in October 1998.

There are a number of reasons for the degree of interest in the Goodyear decision. First of all, the economic implications, both in the case at bar and in the economy at large, were potentially staggering. In the Goodyear case alone, the new landlord lost (absent mitigation) an estimated $11,000,000 in foregone base rent over what would have been the unexpired residue of the term. Secondly, the case, although grounded in very simple real property law concepts, crossed legal sub- disciplines, so that both the mortgage-lending bar and the landlord and tenant bar, and their respective clients, were both keenly interested in the result. Finally, it is one of the few recent cases that harkened all the way back to first principles. In so doing, the decision reminded a number of us practitioners either of what we have forgotten, or, more horrific, what we never knew about the basic rules of the common law of real property.

Facts

All too often, complex and convoluted facts cloud the application of legal reasoning and lead to tangential analysis. The facts in Goodyear are a perfect example of this problem. Any chronological or – 2 – linear rendition of the facts in Goodyear only leads to confusion, and worse, to analysis and argument that are not central to the determination of the substantive law. Instead, the only way to clearly understand the Goodyear decision is to analyse it devoid of virtually all of the ancillary facts, with such ancillary facts introduced by way of addendum as and when needed.

To this end, Madam Justice McKinlay does a notable job of reducing the facts down to a "need to know" basis in the appeal decision, but it is submitted that her rendition of the facts can be distilled down even further. For the purposes of this commentary, the reader need initially only know that: (i) Goodyear Canada Inc. ("Goodyear") was a tenant; (ii) The Canada Life Assurance Company ("Canada Life") was a prior-ranking mortgagee; (iii) Canada Life took possession of the property part way through the term of Goodyear's lease; and (iv) Goodyear continued to pay rent to Canada Life, as mortgagee-in-possession, and Canada Life accepted such rent.

Those who participated in or have followed the litigation to date are, of course, now cringing at the liberties this commentator takes in reporting the facts (or, more appropriately, omitting the facts), but it is submitted that part of the beauty of the decision lies in the simplicity of the central legal issue, and the only way to do justice to this central legal issue is to keep the facts comparatively simple. Of course, there were a number of other facts[FN2] that gave rise to collateral issues that were raised both at trial and in appeal, and these will be introduced later in this commentary in a modular fashion.

The Issue and the "Well-Settled Law"

The principle issue before the courts was whether or not Goodyear was entitled to be relieved from its obligations under its lease with the landlord after Canada Life took possession of the property.[FN3] At trial, Mr. Justice Ground concluded:

It is, in my view, well-settled law that, where a mortgagee goes into possession of mortgaged property, any leasehold interest created by the landlord/mortgagor after the date of the mortgage is terminated and the mortgagee is entitled to evict the tenant unless some agreement exists between the tenant and the mortgagee which creates privity of contract or privity of estate between those parties. It is also well-settled law that, if the tenant remains in possession and pays rent to the mortgagee, a new year-to-year tenancy is created between the tenant and the mortgagee on the terms of the original lease to the extent that such terms are consistent with a year-to-year tenancy, subject to any agreement between the mortgagee and the tenant or conduct evidencing a contrary intention.[FN4]

It was undisputed that Goodyear had continued to pay rent to Canada Life after Canada Life took possession,[FN5] and Mr. Justice Ground found no evidence of an alternative agreement, express or implied by conduct. Accordingly, he held that a year-to-year tenancy had been created between Goodyear and Canada Life, on terms consistent with a year-to-year tenancy,[FN6] terminable on six- months' notice by either party.[FN7]

The theory behind Mr. Justice Ground's "well-settled-law" in Goodyear is easier to comprehend if one views a mortgage as a conveyance of the estate of the mortgagor/landlord to the mortgagee, subject only to an equity of redemption.[FN8] Having transferred its estate, the mortgagor/landlord really has nothing left to convey and is left in possession of the mortgaged premises only pursuant to a license or quasi-lease from the mortgagee contingent upon their being no default under the mortgage.[FN9] Having nothing (in terms of real property) left to convey, the mortgagor/landlord, in purporting to enter into any lease after the granting of the mortgage, is really not conveying any leasehold interest. At best, after a mortgage of the property, all the landlord has to convey to a prospective tenant is a form of quasi-sublease, terminable upon the termination of the mortgagor/landlord's own rather precarious occupation rights. Accordingly, it flows quite naturally that, when the mortgagor/landlord's own right to occupy is lost because the mortgagee's foreclosure, possession or sale of the estate, the subsequent tenants' rights to occupation, which depend solely on the mortgagor/landlord's privilege from the mortgagee, must also be terminated (subject, of course, to an action on the covenant by the tenant against the mortgagor/landlord for the lost quiet enjoyment) unless there is some privity between the tenant and the mortgagee cum landlord. If the tenant nonetheless continues to stay in possession and pays rent, then some new tenancy is created. – 3 –

Absent any evidence to the contrary, the caselaw has deemed such resulting tenancy to be year-to- year with six-months' notice to quit required of either side.

Madam Justice McKinlay, with Brooke, J.A. and Carthy, J.A. concurring without separate reasons, came to the same conclusions (i.e., a year-to-year tenancy had been created between Goodyear and Canada Life after Canada Life took possession), with, however, a rather notable exception regarding the actual termination of the original lease between Goodyear and the landlord. The balance of this commentary will focus on the Court of Appeal reasons.

Privity of Contract

Burnhamthorpe Square Inc. ("Burnhamthorpe") (the successor in title to Canada Life in the relevant mortgage) argued[FN10] that it could compel Goodyear to honour the terms of the original lease because Burnhamthorpe, through Canada Life, had privity of contract with Goodyear. How this is so, is not, however, entirely intuitive since Goodyear's lease was with the mortgagor/landlord and, although there was evidence of protracted negotiations for a non-disturbance agreement between Goodyear and Canada Life, Goodyear never finalized any express contract of any sort with Canada Life (or its predecessor in title to the relevant mortgages, Aetna Life Insurance Company of Canada ("Aetna")). Indeed, at trial, Mr. Justice Ground could not find any evidence of any privity of contract between Aetna, Canada Life or Burnhamthorpe, on the one hand, and Goodyear, on the other hand. The various arguments proffered by Burnhamthorpe on privity of contract were clever, however, and are canvassed below.

Burnhamthorpe noted firstly that Aetna had originally received, as collateral security for the mortgage, an assignment of rents and leases (the "Assignment"). Furthermore, such assignment of rents and leases, in typical fashion, expressly assigned "future leases" and spoke in terms of an "absolute" assignment instead of merely as and by way of security. These facts together, Burnhamthorpe argued, would somehow result in the privity of contract between Canada Life and Goodyear necessary to allow Burnhamthorpe to insist that Goodyear perform the original lease.

Madam Justice McKinlay attacks the heart of the argument by considering whether or not a landlord's interest in a contract like a commercial lease can be assigned and, if so, whether the Assignment was a sufficient instrument for so doing. Presumably, if she could answer both in the affirmative, then Canada Life and Burnhamthorpe would have had privity of contract with Goodyear and could, therefore, enforce the original lease against Goodyear.

Her analysis starts with the basic premise that privity of contract requires the existence of "mutual rights and obligations" between two parties that are alleged to share the privity. Accordingly, the analysis became whether the delivery of a Assignment from the landlord/mortgagor to the mortgagee was sufficient to create the requisite mutuality of burdens between the mortgagee and the tenant. For the most part, a landlord's interest in a commercial lease is a combination of a bundle of benefits (mostly, the right to receive rent) and, even in "triple net" leases, a bundle of burdens (e.g., common area maintenance, structural repairs, casualty insurance, etc.). Madam Justice McKinlay notes that, under the Assignment, not only does the mortgagee[FN11] not expressly assume any of the burdens of the landlord under the lease assigned to it, but, rather, the mortgagee bends over backwards to expressly deny any assumption of the obligations of the landlord under the original lease. Burnhamthorpe submitted that "...the fact that the mortgagee in the present case did not take on any obligations of the lessor under the leases is irrelevant...",[FN12] but the Court of Appeal called that submission "flawed".[FN13] With mutuality stated to be the test of privity of contract, and non- mutuality so blatantly set forth in the Assignment, it is not surprising that the Court of Appeal found that the Assignment could not have created privity of contract between Goodyear and Aetna (or through Aetna, Canada Life, and, ultimately, Burnhamthorpe).

Nor, it is submitted, would it have been any different if the Assignment had been drafted without the offending anti-assumption language, or, indeed with express assumption covenants on the part of the mortgagee. Madam Justice McKinlay went on to note that the "common law has consistently held that obligations cannot be assigned [except by novation]."[FN14] Thus, while it followed that the landlord/mortgagor could always have assigned its right to collect rent (i.e., a debt) to a mortgagee without the consent of the tenant, the court implied that the landlord/mortgagor could never, at least without the consent of the tenant to such novation, have assigned the burdens of the landlord under – 4 – the lease to the mortgagee, even if the mortgagee were prepared to assume such obligations. In other words, unless the tenant agrees with the mortgagee to the transfer of the reversion and the burdens of the reversion (i.e., enters into a contract with the mortgagee), then privity of contract between the mortgagee and the tenant under a lease can simply never arise.

It is submitted, however, that, although the Court of Appeal ultimately achieves the right conclusion (i.e., that no privity of contract existed between the tenant and the mortgagee), the Court of Appeal's "mutual rights and obligations" analysis is arguably confused and misleading. Reading that portion of the reasons, practitioners are led to the conclusion that, if only somehow the burdens could also be transferred, then privity of contract can be established between what otherwise would have been strangers.[FN15] Although the Court of Appeal sidesteps its own logic by simply concluding that burdens can never be assigned without a new contract, it is submitted that, even if burdens could be unilaterally assigned (and this commentator agrees with the Court of Appeal in concluding that they cannot), privity of contract would still not be created. Privity of contract has everything to do with the identities of the parties and nothing to do with the benefits and burdens allocable to such parties. So, if A were to contract with B, and B assigns the benefits of that contract to a stranger and somehow also manages to legally transfer the burdens of that contract to the stranger, it cannot mean that, absent statutory intervention, somehow A wakes up one day to find itself standing in privity of contract with a total stranger! True, A and the stranger may share privity of estate in respect of certain covenants if the subject-matter of the contract was real property. Furthermore, the stranger, with the giving of proper notice, may attain a type of statutory quasi-privity (sufficient at least to enforce the contract in its own name) using Section 53 of the Conveyancing and Law of Property Act[FN16] (the "C.L.P.A.") for debts and choses of action, but the test of privity of contract remains, for the most part, whether or not the two parties alleged to share privity of contract actually dealt with each other in contract. In a Goodyear scenario, both the mortgagee and the tenant deal with the landlord/mortgagor, but never do the mortgagee and the tenant actually contract with each other. It follows, therefore, that, unless a non-disturbance and attornment agreement (i.e., a contract) is entered into directly between the mortgagee and the tenant, there could never be privity of contract between a prior-ranking mortgagee and a subordinate tenant of the landlord. To the extent that the mortgagee could have enforced the lease in Goodyear against the tenant, one would have thought the argument had to be in privity of estate.

Absolute versus Security

Both the Court of Appeal and the trial judge also spent some considerable time addressing the issue of "absolute" assignments versus assignments for "security" purposes. It would appear from the decisions of both of the courts that the arguments before them suggested that if the Assignment was an absolute assignment, then privity of contract was created between the tenant and the mortgagee, but where the Assignment was but by way of security, then no privity of contract arose between the tenant and the mortgagee. Burnhamthorpe had argued that the wording of the Assignment clearly spoke in terms of absolute assignment, ergo, the assignment was absolute. Needless to say, neither Mr. Justice Ground nor Madam Justice McKinlay accepted that submission, finding, instead, that, where an equity of redemption exists, then the assignment is but security, irrespective of the wording of the transfer language. On the facts in Goodyear, it would have been impossible to credibly argue that an equity of redemption did not exist in favour of the mortgagor in Goodyear.

The better question, and one that is not particularly well answered in either level decision, is the importance of the distinction between "absolute" and "security only" assignments.[FN17] Arguably, whatever the distinction may be, its legal implications would affect only the mortgagor/mortgagee relationship and would not alter or affect the mortgagee/tenant relationship (whatever that may be). To analogize, consider a book debtor in the face of a general assignment of book debts given by its book creditor to a secured creditor. As between the book debtor and the secured creditor (notice, perfection and other procedural requirements being presumed), the book debt has to be paid to the secured creditor, whether the assignment was absolute or by way of security (the only difference being that, in the case of an assignment of book debts as security, the original book creditor could redeem the indebtedness owing to the secured creditor before the book debts are repaid, thus reinstating itself as the proper payee of the book debts).[FN18] Madam Justice McKinlay appears to come to the same conclusion, noting that: – 5 –

...it is my view that the question of whether the assignment of rents was absolute does not resolve any issue in this case...the answer to that question as between mortgagor and mortgagee does not answer the question of privity of contract as between lessee and the mortgagee.[FN19]

Madam Justice McKinlay appears to accept that the "absolute" versus "security" debate was not only moot, but worse, somewhat of a red herring. Nonetheless she comments, curiously enough, that the issue was a "vexing"[FN20] one and devoted some considerable analysis to the question, finding, luckily enough, that the Assignment was, in any event, an assignment by way of security — query what she would have done if she concluded that the Assignment was an absolute assignment.[FN21]

What is an Assignment of Lease?

This begs the question, of course, of just what the assignment of leases and rents, as used in typical mortgage financing, actually is. According to the Court of Appeal in Goodyear, it is little more than an assignment, as and by way of security only (and subject, therefore, to an equity of redemption), of a chose in action, being an assignment of the mortgagee's right to collect rent in its own name and presumably to the exclusion of the mortgagor. It is not a transfer of the reversion (we still use deeds for that), nor does it operate to create any contractual privity between the mortgagee and the tenant. Indeed, according to the Court of Appeal in Goodyear, an assignment of lease is an interest only in personalty (i.e., rents) and not a transfer of an interest in land (so why does the mortgage-lending bar insist on registering them on title and why do land registrars persist on allowing them to be registered?).[FN22]

Is an assignment of lease a fundamentally different instrument from what the mortgage-lending bar thought it was before the Court of Appeal in Goodyear. That would suggest, in part, that, prior to Goodyear, the mortgage-lending bar treated an assignment of lease (in all its various permutations[FN23]) as a defacto instrument of attornment. Alternatively put, it would imply that a mortgage-lending lawyer prior to Goodyear would have eschewed the need for a proper non- disturbance and attornment agreement on the basis that there was already an assignment of lease delivered by the mortgagor.[FN24] Even if it can be said that the attributes of an assignment of lease were never fully understood until Goodyear, it is submitted that the mortgage-lending lawyers, even before the Court of Appeal's decision in Goodyear, would not have considered an assignment of lease as a substitute for a proper non-disturbance and attornment agreement (or at the very least, some sort of covenant from the tenant itself in favour of the mortgagee[FN25]). So, while the attributes of an assignment of lease and the role of the instrument in an overall mortgage security package have been clarified by Goodyear, it may be somewhat overreaching to suggest that the revelation has radically changed the way the mortgage-lending bar interprets or uses the assignment of lease.[FN26]

Non-Disturbance Agreements

The Court of Appeal affirmed that a non-disturbance agreement between a mortgagee and the mortgagor's tenants would in fact constitute the requisite privity of contract to compel a tenant to attorn. The "non-disturbance agreement" referred to by the Court of Appeal is probably a non- disturbance and attornment agreement, containing both a non-disturbance covenant on the part of the mortgagee and an attornment covenant on the part of the tenant. Understanding that the non- disturbance agreement contemplated by the Court of Appeal is signed by both the mortgagee and the tenant and contemplates reciprocal covenants, it is easy to see how it would create privity of contract between the mortgagee and the tenant (indeed, impossible to see how it would not create privity of contract!).

In a particularly ironic twist of fate in Goodyear, there was evidence that Goodyear had desperately wanted a binding non-disturbance agreement with the mortgagees (both from Canada Life and, before that, Aetna), and went so far as to unilaterally sign a form of non-disturbance agreement that was never signed by any mortgagee. Furthermore, there was one non-disturbance agreement in the file signed by both Goodyear and Aetna, but that related to a specific earlier lease which had since been surrendered! Curious how changing economic times can so easily and so suddenly reverse bargaining positions! – 6 –

Privity of Estate

Having established that there had never been privity of contract between Canada Life and Goodyear, the issue before the Court of Appeal was whether or not there was privity of estate between the two, since the establishment of either privity would have entitled Burnhamthorpe (as the assignee of Canada Life's rights) to force Goodyear to abide by the terms of the original lease.

To understand fully how and why the existence of privity of estate cures the absence of privity of contract, it is important to understand the history of the doctrine of privity of estate and why Professor Scane referred to it as "...almost the only part of [the English feudal system of tenure] with any remaining practical importance."[FN27] Paraphrasing years of medieval jurisprudence, in the very early common law, a tenant was akin to a modern licensee, enjoying rights in land pursuant to a contract with a landlord. The frailty of these in personam rights was obvious. Since the rights could only be enforced against the immediate landlord itself, any transfer of the lands (voluntary or otherwise) would be fatal to the tenant's interest in those lands (the tenant's claim being reduced to a claim in damages against the landlord for breach of the covenant of quiet enjoyment, but not entitling specific performance against the new owner in respect of the lands themselves). In response to this lack of tenure, the common law eventually developed the doctrine of "privity of estate" whereby tenants (and all of their assignees) would enjoy certain rights that ran with the land against the landlord (and all of its assignees), in effect converting what had theretofore been rights in personam against the landlord into rights in rem against all comers claiming the reversion in the land.[FN28]

It is this privity of estate that Burnhamthorpe argued existed between Canada Life and Goodyear prior to Canada Life taking possession of the premises. If Burnhamthorpe's claim is correct, then both Canada Life and Goodyear would have been bound by the original lease. The linchpin in Burnhamthorpe's argument again seemed to be the Assignment, which it argued created privity of estate. As aforesaid, the Court of Appeal refused to characterize an assignment of lease as anything more than an assignment of the right to collect rents. The Court of Appeal again expressly denied that the Assignment could transfer the landlord/mortgagor's reversionary interest in the property to the mortgagee, and, in Madam Justice McKinlay's own words, "...privity of estate [only] results when a ...landlord assigns his reversionary interest" ["only" added].[FN29] Since the reversion never moved, it followed that whatever relationship existed between the landlord/mortgagor and the downstream tenants remained as between the landlord/mortgagor and such downstream tenants and could not be enforced by the mortgagee or its successors.

In so finding, however, Madam Justice McKinlay struggles with and ultimately rejects the reasoning in Manufacturer's Life Insurance Co. v. J.K.P. Holding Co.[FN30] In J.K.P., the Alberta Court of Appeal supported the contention that an absolute assignment of lease did in fact pass the landlord's reversion up to the mortgagee, so that the mortgagee and tenant stood in privity of estate with each other, and any subsequent possession (in this case, by foreclosure) by the mortgagee would not affect either the tenant's or the mortgagee's rights under the pre-existing privity of estate.[FN31] The opposing positions of the two appellate courts are wholly irreconcilable, and, to her credit, Madam Justice McKinlay does not attempt to rationalize the two cases or find indistinguishable distinctions — she just calls the Alberta court wrong!

The Reciprocal Estoppel Proviso

The general proposition that a prior-ranking mortgagee may, upon coming into possession of the mortgaged property, evict subordinate-ranking tenants, is subject to one general proviso[FN32]: such mortgagee is not entitled to evict the subordinate-ranking tenants where the mortgagee has previously consented (expressly or implicitly) to the granting of the subordinate lease by the landlord.[FN33] Burnhamthorpe takes this fairly well accepted proviso and advances what this commentator is fond of referring to as a "reciprocal estoppel proviso": if a mortgagee cannot evict subordinate-ranking tenants whose leases it had previously consented to, it must therefore follow that a subordinate-ranking tenant whose lease had been previously consented to by the mortgagee could not then refuse to attorn to that consenting mortgagee if such mortgagee took possession.

Dealing with this "reciprocal estoppel proviso" at the trial level, Mr. Justice Ground rendered the concept moot by concluding that there simply was no evidence of any consent (express or implied) on – 7 – the part of Canada Life to the lease. He nonetheless ventured on to conclude that the general proviso regarding a mortgagee's prior consent operated only "...to preclude Canada Life from evicting Goodyear without notice after taking possession,"[FN34] and could not be set up as a sword to compel Goodyear to attorn. Speaking further about the possibility of compulsory tenant attornment by way of mortgagee consent, Mr. Justice Ground concluded:

...even if there had been written consent...this would not create a landlord and tenant relationship based on privity of contract or privity of estate between the mortgagee and the tenant. One cannot create such a relationship by a unilateral consent to the lease on the part of the mortgagee. Such an obligation can only arise through an agreement by which the tenant attorns to the mortgagee for the lease term...[FN35]

The Court of Appeal supports the finding of fact regarding the absence of any consent by Canada Life, but was surprisingly contradictory in its ruminations (now all rendered obiter by the finding that there simply was no consent) on the availability of a "reciprocal estoppel proviso" applicable against the tenant. The Court of Appeal at first bullishly supports Mr. Justice Ground's conclusions regarding the impossibility of forcing attornment upon a tenant based upon whether or not the mortgagee had unilaterally consented to the lease:

I agree with that statement as it relates to privity of estate. Consent by the mortgagee could never result in the mortgagee and the lessee being in a tenurial relationship which is the basis of privity of estate.[FN36]

The Court of Appeal later, however, meekly concluded that:

Strangely, although the law seems clear that the mortgagee would be bound in such a situation, whether the tenant would be bound without attorning to the mortgagee is unclear [emphasis added].[FN37]

It is submitted that the Court of Appeal's vacillation on this point might have been indicative of a desire on the part of the Court of Appeal to find a "reciprocal estoppel proviso" that would also bind the tenant. After all, it seems hardly fair that the mortgagee could estop itself from asserting its rights through its consent without any similar risk on the part of the tenant. To the extent that a tenurial relationship can be created by estoppel, it only seems fair that such estoppel should go both ways.

The Alternative Reciprocal Estoppel Proviso — Actual Notice

A far more interesting take on the "reciprocal estoppel proviso" argument would have seen Burnhamthorpe argue that, since a prior-ranking mortgagee is essentially estopped from evicting subordinate-ranking tenants where such mortgagee had previously consented (expressly or implicitly) to the granting of the subordinate leases by the landlord, then a tenant who leases from a landlord where the tenant has knowledge (actual or constructive) of the existence of a prior-ranking mortgage, ought to be estopped from refusing to attorn to that prior-ranking mortgagee if and whenever such mortgagee takes possession. This alternative version of the "reciprocal estoppel proviso" was discussed and rejected by Mr. Justice Ground in the trial decision. He accepted that registration of the mortgage would have been notice to Goodyear, but goes on to say that:

I am not satisfied that [notice to Goodyear of the prior-ranking mortgage] is determinative of any issue before this court. The fact that Goodyear may be deemed to have had notice of the assignments of the 1987 Leases does not, in my view, result in the creation of any obligations as between Goodyear and Canada Life or create any privity of contract or privity of estate between them.[FN38]

Curiously enough, there is scarcely a mention of this actual notice estoppel/deemed attornment argument in the Court of Appeal decision, save for a single sentence in the "privity of contract" section of the reasons fully endorsing Mr. Justice Ground's trial position without further reasons.[FN39] – 8 –

There are no other authorities to this commentator's knowledge directly on point, but it is submitted that the rather cursory treatment of the argument by both courts is regrettable. From a "fairness" perspective, the notion does not seem quite as ridiculous as either of the courts implied. Indeed, it is submitted that if one were trying to introduce some equitable estoppel rule affecting the tenant as a corollary to the equitable estoppel rule affecting the mortgagee, one would not structure the test so that the tenant's attornment obligations are to be determined by the unilateral consent of the mortgagee! Instead, one would base the test on some sort of voluntary action on the part of the tenant that would suggest a waiver of its strict legal rights (indeed, an act of acquiescence) — say, for instance, leasing in the face of actual notice of a registered mortgage without the benefit of a non-disturbance covenant! The alternative, of course, is to eliminate the consent proviso altogether, so that a mortgagee is not bound to non-disturbance even if it gave prior consent to the subordinate lease. In this way, at least all parties will know that the general rule will always apply and that the only sure way for either side to avoid its application is the entering into by both parties of proper non-disturbance and attornment agreements.

Continuance of the Original Lease

To this point in the Court of Appeal judgment, it can safely be said that Goodyear introduces no new law. Where Goodyear will be remembered, however, and where Goodyear does add new law, albeit in obiter, is in Madam Justice McKinlay's ground-breaking clarification of the status of the original lease between the mortgagor/landlord and the tenant after a prior-ranking mortgagee has taken possession. It is also the first and only significant divergence between the trial and appellate versions of Goodyear.

Mr. Justice Ground at trial is totally unequivocal as to the status of the original lease between the landlord and the tenant after a prior-ranking mortgagee has taken possession. In a well written passage that starts his reasons, he concludes:

It is, in my view, well-settled law that, where a mortgagee goes into possession of mortgaged property, any leasehold interest created by the landlord/mortgagor after the date of the mortgage is terminated and the mortgagee is entitled to evict the tenant unless some agreement exists between the tenant and the mortgagee which creates privity of contract or privity of estate between those parties [emphasis added].[FN40]

Although Mr. Justice Ground at trial cites "well-settled law" as the authority for his conclusions of law as to the termination of the original lease between the landlord and the tenant, he does not actually provide authorities supporting his proposition. In fairness to him, however, cases may not have been needed, however, since the analysis really was fairly well-settled law.[FN41] Nonetheless, on appeal, the old English Court of Appeal decision in Corbett v. Plowden[FN42] and the Ontario Court of Appeal decision in Page v. Welford[FN43] applying Corbett v. Plowden were both advanced in support of the trial conclusion that the original lease had been terminated upon the taking of possession. The Court of Appeal openly rejects the proposition that the original lease between the landlord and Goodyear was terminated upon the taking of possession by Canada Life. Some caution, however, should be taken in reading this portion of the appellate judgment. If one were to read the Court of Appeal's reasons out of context, it actually appears as if the Court of Appeal is suggesting that the orignal lease between the landlord and Goodyear was still in place and not supplanted by a year-to-year tenancy between Goodyear and Canada Life. This is clearly not what the Court of Appeal was saying. Instead, what the Court of Appeal concluded was that the original lease remained in effect as between the tenant and the landlord, but to the extent that the mortgagee had asserted possession, the new lease, if any, as between the tenant and the mortgagee, would govern the occupation of the premises.

To understand why the Court of Appeal refused to find that the original lease had been terminated, it is important to appreciate the particular evil that was sought to be cured. In particular, the theoretical problem that arises when one allows the original lease to be automatically terminated by operation of law upon the taking of possession by a prior-ranking mortgagee relates to the mortgagor/landlord's right of redemption. Imagine a project that is burdened with a number of uneconomic leases, none of which had been consented to by the prior-ranking mortgagee. A landlord under such circumstances might find it, shall we say, "convenient," to default under such mortgage, forcing the mortgagee to take possession. If the trial decision in Goodyear governed, all of these – 9 – uneconomic leases would be terminated by operation of law immediately upon the mortgagee's taking of possession, possibly to be replaced by year-to-year leases terminable upon six-months' notice. The landlord/mortgagor could then redeem the mortgage immediately and reap the benefits of the materially improved leasing situation.[FN44] Indeed, if the mortgagor timed its redemption to precede the taking of any rents by the mortgagee-in-possession, the landlord might even be able to re-acquire the property free of year-to-year leases, in effect, vacant possession! This hypothetical does not even begin to countenance the possibility of collusion between the mortgagee and the landlord,[FN45] but one can clearly understand why the Court of Appeal, from a policy perspective, did not want to conclude that the original leases had been terminated automatically upon the assertion of possession by the mortgagee.

In the end, the Court of Appeal finds the original leases to continue, in effect in the background, to govern the landlord/tenant relationship if and whenever the landlord recovers possession of the premises. This conclusion regarding the status of the original lease does not affect the ultimate outcome of Goodyear since the landlord in Goodyear never redeemed. It is, however, useful obiter and it becomes an important cornerstone in Burnhamthorpe's clever foreclosure argument.[FN46]

The Effect of Foreclosure

Some time after Canada Life took possession of the property, it assigned its mortgage security to Burnhamthorpe, which in turn foreclosed on the mortgagor/landlord. Although this does not appear to have been dealt with at trial, Burnhamthorpe argued before the Court of Appeal that the foreclosure itself created the requisite privity of estate! Paraphrased significantly, Burnhamthorpe's position was that:

(i) the Goodyear lease was "carved"out of the landlord/mortgagor's equity of redemption;

(ii) a foreclosure acts as an assignment of the mortgagor's equity of redemption to the mortgagee; and

(iii) it follows, therefore, that, upon foreclosure, Canada Life became vested with the reversion of the original lease and thus had privity of estate sufficient to enforce the original lease against Goodyear.

The Court of Appeal's treatment of the effect of foreclosure comes late in the reasons, immediately after the Court of Appeal concludes that the original lease had not in fact been terminated, and well after the Court of Appeal otherwise deals with privity of estate. This is arguably because, for Burnhamthorpe's foreclosure argument to succeed, it was first necessary to establish that the original lease had not been terminated by operation of law months earlier when Canada Life took possession of the property. After all (and this may explain why the argument did not appear to have been dealt with in the trial division judgement), if the original lease had already been terminated by the time the final order of foreclosure was being rendered, there would have been no estate for the foreclosing mortgagee to be privy to.

This foreclosure argument is somewhat attractive and it takes a moment's thought to understand why the Court of Appeal thought it was wrong. The problem in the analysis lies in Burnhamthorpe's characterization of the foreclosure as a sort of judicial assignment of the mortgagor's interests in the mortgaged property to the mortgagee. To understand the weakness in Burnhamthorpe's argument, it is necessary to appreciate the nature of foreclosure, and to do that, it is necessary to have at least a cursory understanding of the history of foreclosure. Condensing a couple of hundred years of English common law into a few sentences, in early common law, a mortgage was nothing short of a grant in fee simple from mortgagor to mortgagee, subject only to an equity of redemption, and later in history, the right to retain possession. Over the years, the equity of redemption gained perhaps too much legal strength and was invoked over and over by delinquent mortgagors, often years after the mortgagee would have otherwise been entitled to possess the property. As a response to the perceived abuses by the Chancery and the uncertainty it engendered, it became appropriate for the law to introduce proceedings to terminate the equity of redemption once and for all after certain (still generous) procedural steps had been observed (passage of time, notice, opportunity to cure, etc.), and foreclosure was born.[FN47] Foreclosure never was, however, a transfer of the equitable estate – 10 – of the mortgagor (whatever that is), and cannot therefore serve as the instrument of privity of estate argued by Burnhamthorpe. In her own words, Madam Justice McKinlay concludes:

We were directed to no authority which specifically stands for this proposition, and there is, as I see it, a basic flaw in this portion of Burnhamthorpe's argument. When Angeles' [i.e., the landlord's] equity of redemption was foreclosed, the foreclosing mortgagee did not replace Angeles by becoming owner of its equity of redemption. That equity was gone as a result of foreclosure, and the legal estate of the mortgagee became a vested estate free from the mortgagor's equitable claim.[FN48]

Case law often describes the mortgagor's equity of redemption as being an "estate" in land,[FN49] which makes for difficult analysis, implying as it does that both the mortgagee and the mortgagor each have "estates" in the land. Madam Justice McKinlay herself accedes in part to the trend by accepting Burnhamthorpe's submission that the original leases were "...carved out of the equity of redemption of the landlord..."[FN50] Arguably, the only relevant "estate" is the fee simple that has been granted to the mortgagee by the mortgage instrument, and that all a mortgagor has left after such grant is its right in equity to obtain a return of that fee simple estate upon repayment of the mortgage debt.

An Alternative View of the Effect of the Foreclosure — An Assignment of the Lease-Back

Although this commentator finds it difficult to conceptualize the mortgagor's equity of redemption as an "estate" in land, it is not entirely wrong to suggest that a mortgagor enjoys some sort of an interest in the mortgage land. After all, the mortgagor is legally in possession of the land and would, for instance, have the right to eject a trespasser. That certainly would seem to have some of the features of an estate in land. However, this possessory estate is more in the nature of a lease or license[FN51] back from the mortgagee to the mortgagor after the mortgage[FN52] and ought not be confused with the equity of redemption enjoyed by the mortgagor and which is often described as an "estate". Query whether Burnhamthorpe would have enjoyed any further success under the "Effect of Foreclosure" tack had it argued that it was this "lease-back estate" that the landlord enjoyed and that was assigned to the mortgagee upon foreclosure. The argument would then have taken landlord and tenant overtones and would have been something along the lines of the following:

(i) the mortgagor's right to remain in possession is in the nature of a leasehold estate, out of which the tenant's subleasehold estate is carved;

(ii) a foreclosure, in addition to extinguishing the equity of redemption, also extinguishes the mortgagor's right to remain in possession of the mortgaged property pursuant to the aforesaid quasi-leasehold estate;

(iii) by analogy, the extinguishment of a leasehold estate (e.g., a surrender of lease) typically operates as both a release and an assignment of the leasehold back to the grantor, so a foreclosure, in addition to extinguishing the equity of redemption, should operate likewise (i.e., as a release and an assignment of the quasi-leasehold back to the mortgagee); and

(iv) if the mortgagor's quasi-leasehold estate, out of which the tenant's leasehold estate was granted, is assigned back to the mortgagee, it follows that the mortgagee and the tenant stand in privity of estate with each other, and the original lease binds both the prior-ranking mortgagee and the subordinate tenant.

In a pure leasehold analysis, the issue then is whether there is privity of estate between a subtenant and a head landlord where the sublandlord/head tenant has surrendered its headlease to the head landlord. Clearly, prior to any surrender, the head landlord and the subtenant shared neither privity of estate nor privity of contract. Equally clearly, an assignment of the headlease by the sublandlord/head tenant to anyone other than the head landlord would create privity of estate between the subtenant and the assignee sublandlord/head tenant; but does an assignment of the headlease by the sublandlord/head tenant to the head landlord pursuant to a surrender then create privity of estate between the head landlord and the subtenant?[FN53] Of course, much of the common law is now somewhat confused by the introduction of statutory non-disturbance for leases,[FN54] but the question remains somewhat of a teaser.[FN55] – 11 –

The Estoppel Certificate

Also considered in the Court of Appeal's decision was the effect, if any, of the estoppel certificate issued by Goodyear to Burnhamthorpe. The estoppel certificate had been heavily doctored by Goodyear's counsel before execution and delivery to be subject to, inter alia, ..."whatever legal effect the intended foreclosure...might have and the legal effect of any other action taken pursuant to the charges or mortgages affecting the property,"[FN56] and Mr. Justice Ground found that such language was clearly sufficient to prevent an estoppel argument from succeeding against Goodyear. Unfortunately, from a jurisprudential perspective, the Court of Appeal simply found that, whatever the legal effect may have been of the doctored estoppel certificate, Burnhamthorpe simply did not rely on the estoppel certificate and was bound to close irrespective of what the estoppel certificate may or may not have contained. Without any such reliance, the estoppel certificate would not estop Goodyear from abandoning the original lease.

To the Supremes

Burnhamthorpe is now seeking leave to appeal Goodyear to the Supreme Court of Canada. Paraphrasing significantly, the argument is that the decision of Madam Justice McKinlay, while perhaps technically correct, no longer makes commercial sense, and that the Supreme Court of Canada should, in effect, change the law to compel mandatory attornment. There is some merit to the argument,[FN57] since one cannot help but sense that Goodyear achieved a windfall in this scenario, having been relieved of an $11,000,000 rent obligation simply because Canada Life elected to take possession of the mortgaged property. On the other hand, there is no suggestion by Burnhamthorpe that the corollary (i.e., mandatory non-disturbance) should also be binding upon mortgagees. According to Burnhamthorpe's leave materials,[FN58] the mortgagee ought to be able to compel a tenant to comply with the tenant's lease with the mortgagor, without the mortgagee being bound to honour the same lease (by simply selling under its power of sale, the mortgagee will be entitled to cut out all downstream encumbrances, including subordinate tenants). It will be interesting to see how the Supreme Court, if leave is granted, will reconcile a mortgagee's right to compel a tenant to comply with a lease contract made between the tenant and the mortgagor/landlord, without a reciprocal right on the part of the tenant to compel the mortgagee to honour the mortgagor/landlord's quiet enjoyment covenant contained in that lease contract. The worst of all worlds for mortgagees would perhaps see both compulsory non-disturbance and attornment mandated by the Supreme Court. In as many cases as mandatory attornment will save a favourable tenancy, mandatory non-disturbance will also leave mortgagees bound by unfavourable tenancies.[FN59]

An alternative argument that will likely be put to the Supreme Court will be based on a variation of the proposition that a reversion can be assigned separate from the fee (i.e., that an assignment of future lease reversions by a mortgagor/landlord will give the assignee thereof privity of estate sufficient to enforce the future leases against the tenants thereunder), the direct antithesis of what the Court of Appeal concluded cannot be done. The key to this argument will be to convince the Supreme Court that "reversion" means both the remainder of the fee estate after the granting of the lease and the interests of the landlord during the term of a lease (e.g., the right to collect rents and to enforce remedies, etc.). It is this latter notion of "reversion" that is arguably assignable by an assignment of lease by the mortgagor/landlord and which will entitle a mortgagee that has been assigned such a reversion to enforce a lease against a subordinate tenant.[FN60] There is some merit to this approach as well.[FN61]

Both proposals leave open the very real question of the assumption of covenants by the mortgagee. Both Canada Life and Burnhamthorpe are suggesting that, on whatever principle, there should exist privity of estate (and, although perhaps not expressed as such, the argument is only in favour of privity of estate and not of privity of contract) between the mortgagee cum landlord and the subordinate tenant. Are they then suggesting that the mortgagee will be bound by the covenants of the landlord/mortgagor (e.g., structural repairs, common area maintenance, etc.)? The theories are strangely silent on the point, but one would have to assume that for the mortgagee cum landlord to obtain the benefits of some sort of deemed attornment, it would, as quid pro quo, have to assume the obligations of the landlord/mortgagor.[FN62]

Conclusion – 12 –

Based upon Madam Justice McKinlay's reasons in Goodyear, and barring any excitement at the Supreme Court of Canada, the law in Ontario is as follows:

1. Absent a non-disturbance and attornment agreement between them, there is neither privity of estate nor privity of contract between a prior mortgagee and a subordinate tenant. As a result, when a prior mortgagee takes possession of mortgaged property, the prior mortgagee is entitled to evict all subordinate tenants, and the subordinate tenants are may be released from the obligations of their leases.

2. If, after the prior mortgagee takes possession, the subordinate tenant remains in possession of the mortgaged property and pays rent to the mortgagee cum landlord, a new tenancy is created between the prior mortgagee, as lessor, and the subordinate tenant, as lessee.

3. Absent any conduct or agreement indicating a mutual intent to the contrary, the new tenancy between the prior mortgagee and the subordinate tenant will be year-to-year, terminable on six-months' notice, on such terms of the old lease that are consistent with a year-to-year tenancy.

4. Upon the taking of possession under such circumstances, the former lease between the mortgagor/landlord and the subordinate tenant is not terminated, per se. Instead, it remains operative "in the background" to be, in effect, rejuvenated if the mortgagor/landlord subsequently redeems or otherwise re-acquires possession of the mortgaged property from the mortgagee.

5. Consent by the prior mortgagee to the subordinate lease will estop the prior mortgagee from refusing non-disturbance upon the taking of possession by the mortgagee, but the estoppel is not reciprocal, so that notice of the prior mortgage by the subordinate tenant at the time the lease was entered into will not prejudice the subordinate tenant's right to refuse attornment upon the taking of possession by the prior mortgagee.

6. The typical assignment of rents and leases given as security collateral to the mortgage does not create either privity of contract or privity of estate, and acts only as an assignment of the right to collect rent.

7. Estoppel certificates will not bind a tenant to attornment where the mortgagee or purchaser therefrom cannot demonstrate that such mortgagee or purchaser relied on the estoppel certificate to its detriment.

8. Foreclosure does not operate to assign the equity of redemption from the mortgagor/landlord to the mortgagee. Accordingly, even if a subordinate lease is said to be "carved out of the equity of redemption" of the mortgagor/landlord, a foreclosure does not create privity of estate between the prior mortgagee and the subordinate tenant.

9. Where an equity of redemption exists, assignments and other conveyances are not absolute, even where the language of such security documents speak in absolute terms.

This commentator is not quite certain how a particular case acquires the "Rule in x" title. According to some authorities, almost every case that has ever been followed more than once is anointed with the "Rule in x" title. Other authorities seem to limit the awarding of the titular honour to only those cases which have been followed on multiple continents and were decided in centuries other than the last two. Presumably, the protocol is somewhere in between and largely unpoliced. Surprising to this commentator, the "well-settled law" to which Mr. Justice Ground referred to at trial and which was largely upheld on appeal in Goodyear, has never been referred to as the "Rule in" anything (although Corbett v. Plowden and Page v. Welford probably should get the nod if chronology had anything to do with the process). That being said, this commentator now submits that the legal doctrines set forth in Goodyear, including the twist with respect to the continuance in the background of the original lease as between landlord and tenant, should now, for ease of reference if nothing else, be referred to as the "Rule in Goodyear". – 13 –

FN1. (1997), 32 O.R. (3d) 657, 9 R.P.R. (3d) 244 (Ont. Gen. Div.), and (1998), 21 R.P.R. (3d) 1, 166 D.L.R. (4th) 625, 41 O.R. (3d) 321 (Ont. C.A.)

FN2. For a detailed rendition of the facts, see the "Factual Background" section of the trial decision, 32 O.R. (3d) 657 at 661 ff, 9 R.P.R. (3d) 244 at 248 ff and the excellent case commentary by Marilyn Lee, "Goodyear Keeps Rolling", 21 R.P.R. (3d) 28

FN3. The analysis in Goodyear applies only to commercial tenancies in Ontario. Part V of the Mortgages Act, R.S.O. 1990, c. M.40 deems a non-disturbance covenant on the part of mortgagees taking possession of residential premises governed by Part IV of the Landlord and Tenant Act (now the Residential Tenancies Act), R.S.O. 1990, c. L.7.

FN4. 32 O.R. (3d) 657 at 665, 9 R.P.R. (3d) 244 at 251

FN5. In Goodyear, the analysis of possession proved to be somewhat anti-climactic since it seemed widely conceded that the mortgagee had taken possession of the property by discharging its receiver. The Ontario General Division decision in Guscon Enterprises Ltd. v. Andsam Masonry Co. (1995), 48 R.P.R. (2d) 255 startled a number of mortgage remedy lawyers by seemingly setting a fairly low threshold for possession, implying that merely attorning rents and permitting continued possession would itself be sufficient to constitute a mortgagee-in-possession.

FN6. What exactly constitutes lease terms that are "consistent with a year-to-year tenancy" was not enunciated in Goodyear. For instance, are clearly collateral benefits like options to purchase and first rights of refusal, to be incorporated into any such year-to-year tenancies? See Royal Trust Corp. of Canada v. Mahoney (1993), 34 R.P.R. (2d) 65 and Sadie Moranis Real Estate Ltd. v. Hongkong Bank of Canada (1998), 39 O.R. (3d) 691, 17 R.P.R. (3d) 283, both decisions of the Ontario Court General Division (with Sadie Moranis actually referring to the trial decision in Goodyear). NB. The Sadie Moranis decision was recently before the Court of Appeal [(June 5, 1998), Doc. CA C29374 (Ont. C.A.)]. Although the Court of Appeal seemed equivocal on whether or not a right of first refusal was incorporated into the year-to-year lease, it did not overturn the trial decision which held that it was not.

FN7. The Court of Appeal decision also goes into some consideration of Goodyear's cross-appeal regarding the timing issues related to the six-months' notice to quit. This is some of interest to the landlord and tenant bar, but is not relevant to the "Rule in Goodyear" and will not be discussed further in this commentary. Gratitude is expressed to John Lancaster of Fasken, Campbell for his insightful comments on an earlier draft of this case commentary. This footnote proved particularly frustrating for Mr. Lancaster since he is of the view that one of the Court of Appeal's accomplishments in Goodyear was to establish new law in the area of notices to quit.

FN8. Much adieu is often made about Section 6(1) of the Land Registration Reform Act, R.S.O. 1990, c. L.4 (the "L.R.R.A."), as amended, which provides that, "A charge does not operate as a legal transfer of the legal estate in the land to the chargee," with the suggestion that perhaps said Subsection 6(1) now obviates the traditional analysis of mortgagee rights and remedies vis-a-vis downstream tenants. Whatever the effect of Subsection 6(1) of L.R.R.A., it is submitted that it does not affect the Goodyear analysis because Subsection 6(3) of the L.R.R.A. provides that, "Despite Subsection (1), a chargor and chargee are entitled to all of the legal and equitable rights that would be available to them if the chargor had transferred to the land to the mortgagee by way of mortgage..." See also, Kennedy v. Ontario (Agricultural Development Board), 59 O.L.R. 374, [1926] 4 D.L.R. 717 (Ont. S.C.).

FN9. Indeed, in early mortgage law (circa, 1200 A.D.), it was common for the mortgagee to actually keep possession of the mortgaged property until repayment. For a delightful historical overview, see Roach, The Canadian Law of Mortgages of Land (Butterworths), pp. 16-23.

FN10. Canada Life was a party to the litigation as an intervenor, essentially on the side of Burnhamthorpe. In this commentary, largely because it is not clear from the judgements themselves (both at trial and on appeal), no distinction is made between submissions of Burnhamthorpe, on the one hand, and those of Canada Life, on the other hand, and notwithstanding that litigators for both parties would no doubt have preferred otherwise. – 14 –

FN11. The actual mortgagee under the Assignment was The Excelsior Life Insurance Company, which later became Aetna.

FN12. 21 R.P.R. (3d) 1 at 10

FN13. 21 R.P.R. (3d) 1 at 10

FN14. 21 R.P.R. (3d) 1 at 10

FN15. Marilyn Lee, in her case commentary (supra, at Note 2), suggests that the Goodyear problems may be avoided in the future by sale under power of sale (as distinct from foreclosure and presumably without the mortgagee first having taken possession of the mortgaged property) with assignments in blank of the reversions under future leases, given at the time of advance by the mortgagor (which assignments would also have full assumption covenants by the purchaser), together with directions from the landlord/mortgagor to engross such assignments in favour of the future purchaser under power of sale. This commentator is still considering the legal mechanics of this particular proposal, but wholeheartedly adopts Ms Lee's general caveat that "Solicitors acting for purchasers of tenanted buildings from mortgagees will have to be concerned about whether the leases in the building will be enforceable by the purchaser and will have to advise their clients accordingly."

FN16. R.S.O. 1990, c. C.34, as amended

FN17. Ronald Melvin, in "Mortgagees and Tenants: Who's On First?" Mortgage Law 1997: A Comprehensive Review of the Emerging Issues, CBAO at p. 16 makes the rather astute observation that the court probably did not mean to distinguish between "absolute" and "security only," but, rather, probably meant to speak in terms of "floating" and "crystallized."

FN18. Indeed, even if the assignment of book debts was absolute, the book creditor could simply repurchase the book debts before they are paid, the only difference being that, in the case of a general assignment of book debts as and by way of security only, the book creditor's right to redeem would be a matter of right and not subject to the secured creditor's willingness to sell.

FN19. 21 R.P.R. (3d) 1 at 9 and 12

FN20. 21 R.P.R. (3d) 1 at 11

FN21. This commentator suspects that the "absolute" versus "security" debate actually owes its origins to the provisions of Section 53 of the C.L.P.A. and the common law leading up to the enactment of that provision and like legislation in other common law jurisdictions. Section 53 of the C.L.P.A. permits assignees of choses in action and debts to collect and enforce such obligations in their own names notwithstanding that there is no privity of contract between the debtor and the assignee, in effect deeming privity of contract where none had previously existed. Section 53 is, however, limited to "absolute" assignments, hence, the argument that assignments by way of charge cannot be enforced or discharged by an assignee. Section 53 does not, however, apply to real property, so an "assignment of lease", being in this case an assignment of the landlord's reversion, should not create privity of contract between a mortgagee and a tenant even if it could be absolute.

FN22. If an assignment of lease is, as the Court of Appeal suggests, nothing more than an assignment of rents, how does the mortgagee attorn rents given that the assignment is clearly by way of security and not absolute? Indeed, how does a secured creditor with a general assignment of book debts ever enforce such receivables in its own name given that the assignment giving rise to the secured creditor's rights is never absolute? Although it happens routinely in commerce, it may very well be that creditors (as distinct from true buyers) can never really enforce such assignments directly against book debtors. Food for thought the next time one is looking for more qualifications on enforceability opinions.

FN23. Currently, in this commentator's practice, we use a general assignment of rents, a general assignment of rents and leases, a general assignment of rents (P.P.S.A. only), a general assignment – 15 – of book debts, and a specific assignment of lease. References in this commentary to an "assignment of lease" means all of these security instruments.

FN24. Actually, this formulation of the test is not fair since a typical mortgage-lending lawyer would never, in this "belts, suspenders and staple gun" era, "eschew" any additional piece of security, regardless of how repetitive and superfluous it may be.

FN25. This commentator has, with occasional success, taken to adding attornment covenants to estoppel certificates in an attempt at procuring enforceable attornment for mortgagee clients without the usual quid pro quo of non-disturbance.

FN26. Although it is submitted that practitioners do not see the assignment of lease as an instrument of attornment, many practitioners still mistakenly consider the subordination and attornment covenants built into most leases as somehow enforceable by a mortgagee against a tenant. Lavalin Services Inc. v. National Life Assurance Co. of Canada (1984), 42 Alta. L.R. (2d) 28, 70 A.R. 358 (Alta. C.A.) is an appellate case directly on point confirming that, for essentially all of the same reasons raised in Goodyear, the mortgagee has no privity of contract or estate with its mortgagor's tenants and cannot therefore enforce the attornment covenants contained in the lease. According to Lavalin, mortgagees cannot rely on tenant covenants in a lease to attorn to mortgagees because the mortgagees are not privy to such lease and are at best third-party beneficiaries. Some provinces have curative legislation for deemed attornment without privity (see, e.g., Landlord and Tenant Act, The, R.S.M. 1970, c. L70, s. 54). Most such leases also have subordination covenants whereby the tenants also agree to subordinate to future mortgagees. For the same reasons that a mortgagee cannot enforce attornment covenants contained in the lease, does this mean that such subordination covenants are also unenforceable? The answer would seem to be inescapably "yes", with the result that, notwithstanding express words to that effect in the lease, a mortgagee without a direct subordination agreement from a prior-ranking tenant, will not be able to terminate such lease upon taking possession.

FN27. R. E. Scane, "The Relationship of Landlord and Tenant", 1965 Law Society of Upper Canada Special Lecture, p.3, referred to with approval by Madam Justice McKinlay, 21 R.P.R. (3d) 1 at 13

FN28. For an exceptional analysis of privity of estate and privity of contract generally in the leasing context, see P. Simm, "Covenants that Run With the Land" in Haber, Tenant's Rights and Remedies in a Commercial Lease: A Practical Guide, 1998 Canada Law Book

FN29. 21 R.P.R. (3d) 1 at 14. Although Madam Justice McKinlay never comes out and expressly confirms this, it is submitted that a reversionary interest, as contemplated by Goodyear, can only mean the fee simple. It follows, therefore, that a fee can only be transferred by deed or foreclosure, and not through any assignment of lease.

FN30. (1986), 26 D.L.R. (4th) 461, 44 Alta. L.R. (2d) 390, 70 A.R. 360 (Alta. C.A.)

FN31. For an interesting read, see the dissenting reasons of Mr. Justice McDermitt in J.K.P. wherein he contends that nothing short of foreclosure can actually assign the reversion.

FN32. According to Ronald Melvin's analysis, supra, Footnote 17 at page 8, the general proposition is also subject to a proviso denying a prior-ranking mortgagee the right to evict where the mortgage itself provides for the right on the part of the mortgagor to continue to lease the mortgage property, but it is submitted that such a proviso is simply another variation of implied consent in grosse.

FN33. See Davidson v. McKay (1867), 26 U.C.Q.B. 306; Canada Permanent Building & Savings Society v. Rowell (1860), 19 U.C.Q.B. 124; and District Bank Ltd. v. Webb (1957), [1958] 1 All E.R. 126 (Eng. Ch.), all cited with approval by Madam Justice McKinlay at 21 R.P.R. (3d) 1 at 17

FN34. 32 O.R. (3d) 657 at 666, 9 R.P.R. (3d) 244 at 252

FN35. Ibid. – 16 –

FN36. 21 R.P.R. (3d) 1 at 16. This is only correct with respect to the right of the mortgagee to compel attornment. Both courts concede that consent by the mortgagee can create a tenurial relationship by estoppel at the insistance of the tenant.

FN37. 21 R.P.R. (3d) 1 at 17

FN38. 32 O.R. (3d) 657 at 667, 9 R.P.R. (3d) 244 at 253

FN39. 21 R.P.R. (3d) 1 at 12

FN40. 32 O.R. (3d) 657 at 665, 9 R.P.R. (3d) 244 at 251

FN41. For a general discussion of the "well-settled law" see: Rayner and McLaren, Falconbridge on Mortgages, 4d, 1997, §15; Bentley, McNair and Butkus, Williams & Rhodes, Canadian Law of Landlord and Tenant, 6d, 1998, §5; Lem, "Subordination and Attornment" in Haber, Tenant's Rights and Remedies in a Commercial Lease: A Practical Guide, 1998; White and Spring, "Subordination and Attornment" in Haber, Shopping Centre Leases, 1976; Roach, The Canadian Law of Mortgages of Land, §7D; Dunn and Gray, Marriott and Dunn: Practice in Mortgage Remedies in Ontario, 5d, §46; and, for an American perspective, Friedman, Friedman on Leases, 3d, §8.3 and Halper, Shopping Center and Store Leases, Volume 1, 1995, §10.4 an §10.5.

FN42. (1884), 25 Ch. D. 678 (Eng. Ch. D.)

FN43. [1941] 4 D.L.R. 448, [1941] O.W.N. 344 (Ont. C.A.)

FN44. Actually, for the scheme to work, a subsequent encumbrancer (presumably related to the landlord/mortgagor) would have to be the one redeeming, since the original (now evicted) tenants would still have an action in damages against the original landlord/mortgagor for breach of the covenant of quiet enjoyment. To the extent that the scheme is designed to advance the landlord/mortgagor's position at the expense of the tenants, it would hardly have achieved the goal if the leases are all terminated but the landlord/mortgagor, now back in possession, is faced with damage claims equal to its expected benefit.

FN45. Indeed, absent perhaps moral considerations, it would also be in the best interests of the mortgagee to co-operate to rid the property of uneconomic leases without actually staying in possession of the property.

FN46. The dual lease concept is not without its theoretical difficulties, but it seems a relatively harmless and effective way to deal with the threat of deliberate loss of possession followed by sudden redemption. It is difficult to see how a tenant so disposed could have achieved any measure of justice if the lease automatically terminated as held in trial.

FN47. For a better description of the history and theory of foreclosure, see Roach, The Canadian Law of Mortgages, Chapter 1 and Falconbridge on Mortgages, supra, §3.2 and §4.2 ff.

FN48. 21 R.P.R. (3d) 1 at 23-24

FN49. Most notably, Lord Hardwicke's recitation in Casburne v. Inglis (1737), 1 Atk. 603, 2 Jac.& W. 194, picked up with favour throughout the common law world it would seem, including the Supreme Court of Canada, Petranik v. Dale (1976), [1977] 2 S.C.R. 959, 11 N.R. 309, 69 D.L.R. (3d) 411 (S.C.C.)

FN50. 21 R.P.R. (3d) 1 at 23

FN51. Probably more in the nature of a lease than a license since, presumably, a successor of the mortgagor would be entitled to enforce the right of possession against the mortgagee.

FN52. There is some considerable debate regarding the characterization of the mortgagor's continuing right of possession pending default as being that of a tenant from the mortgagee, – 17 – although the proposition does make conceptual sense, and this commentator recalls that the practice is still prevalent in conveyancing practice in the Maritimes. See Falconbridge, supra, §37

FN53. In Spapiro v. Handelman, [1947] O.R. 223, [1947] 2 D.L.R. 492 (Ont. C.A.), a "pure" lease case, that is exactly what the landlord discovered when it accepted a surrender of a lease from a tenant that had, unbeknownst to the landlord, sublet the surrendered premises.

FN54. See Golden Griddle Corp. v. Toronto (City) (1997), 11 R.P.R. (3d) 82, 100 O.A.C. 138, 33 O.R. (3d) 545 and the cases referred to therein at 549, and Section 21 of the Landlord and Tenant Act.

FN55. The flaw in this "quasi-lease argument" may lie in the attempt to analogize a foreclosure to a surrender of lease. Even in the pure leasehold context (where no stretch of the imagination is needed to set up the leasehold estate in the first place), the law may differentiate between a head landlord that forcibly terminates a headlease from the situation where a head landlord accepts a voluntary surrender of a headlease, with involuntary terminations possibly entitling the head landlord to evict subtenants in possession as of the date of termination, and with surrenders possibly requiring the head landlord to recognize the existence of subtenants. It has always seem inexplicable to this commentator why Section 21 of the Landlord and Tenant Act does not seem to apply in the case of surrenders (the deemed non-disturbance provisions only applying where the "...lessor is proceeding by action or otherwise to enforce a right of re-entry or forfeiture..."). Could it be that non-disturbance and attornment are already implied at common law in the case of surrender?

FN56. 32 O.R. (3d) 657 at 671, 9 R.P.R. (3d) 244 at 257

FN57. Indeed, the argument is similar to the "Reciprocal Estoppel Proviso" argument favoured by the commentator. See, supra, at p. 51

FN58. Gratitude is expressed to Bradley McLennan, of Weir & Foulds, for providing a copy of the argument portion of the Burnhamthorpe leave materials to this commentator.

FN59. The suggestion has been made that perhaps doctrines like "fraudulent" conveyance and preferences could be used to protect mortgagees against blatantly non-bona fide leases, but this may ultimately not prove to be satisfactory to most mortgagees if mandatory non-disturbance is imposed. Even where the subordinate lease forced upon the mortgagee is not fraudulent in the fraudulent conveyance or preference sense, what constitutes commercially reasonable may vary significantly from one situation to the next and one mortgagee to the next. Ontario already has mandatory non- disturbance in the case of residential leases (see, Part V of the Mortgages Act, R.S.O. 1990, c. M.40), but the heretofore relatively regulated nature of the residential leasing market in Ontario renders it an unreliable analogy of the effect of introducing mandatory non-disturbance to commercial transactions. For tenants, the benefits of mandatory non-disturbance far outweigh the added imposition of mandatory attornment. Goodyear aside, instances of non-attornment by savvy tenants are actually quite infrequent.

FN60. Gratitude is expressed to Jeremy Johnson of Fraser Milner for his patience in explaining this concept to this commentator, together with apologies, as necessary, if this commentator still does not quite understand the principle.

FN61. Indeed, the argument is vaguely similar to the "Alternative View of the Effect of Foreclosure — An Assignment of the Lease-Back" argument favoured by the commentator. See, supra, at p. 58. Curiously enough, some support for the theory can be found in Section 3 of the Landlord and Tenant Act [renamed Commercial Tenancies Act by S.O. 1997, c. 24, s. 213(5)] which provides that a valid landlord-tenant relationship can still be created even if the landlord has no reversion.

FN62. Curiously enough, a typical non-disturbance and attornment agreement does not impose the mortgagor/landlord's covenants (other than perhaps quiet enjoyment) onto the mortgagee. See Lem, "Subordination and Attornment" in Haber, Tenant's Rights and Remedies, (Canada Law Book) p. 364.

1420111 Ontario Limited, Applicant and Paramount Pictures (Canada) Inc. and Famous Players Inc., Respondents – 18 –

Ontario Superior Court of Justice

Mesbur J.

Heard: October 22, 2001 Judgment: December 17, 2001 Docket: 01-CV-213177

Proceedings: additional reasons to (2001), 45 R.P.R. (3d) 109 (Ont. S.C.J.)

Counsel: Jeffrey W. Kramer, for Applicant Bruce S. Batist, for Respondents

Subject: Property; Civil Practice and Procedure

Practice --- Costs — Costs of particular proceedings — Interlocutory proceedings — Motions and applications

Applicant was successful on application for order that offer to lease was valid, binding and subsisting between parties and for declaration that respondents remained bound by its terms — Applicant entitled to party and party costs of application — Applicant's refusals to grant adjournments requested by respondents and to accept further affidavit of respondents' witness were unreasonable and resulted in unnecessary court attendance on three occasions prior to hearing of application — Applicant was not entitled to costs of three attendances — Second attendance resulted from applicant's refusal to accept further affidavit from respondents and, as such, no costs of second attendance were awarded — On actual return date for application, respondents' counsel advised applicant's counsel that he was on stand-by for trial and in circumstances, given that request for adjournment should have gone on consent, respondents were entitled to costs of appearance, fixed at $672 — Applicant's bill of costs covered services which began long before actual preparation of material for application, which were not properly subject of costs of application — Costs for preparation for and argument of application fixed at $12,400 plus $2,688 for time spent on examinations and costs for disbursements fixed at $2,202.

Annotation

The supplemental reasons in 1420111 Ontario Ltd. v. Paramount Pictures (Canada) Inc. to which this annotation is appended offer little of interest to real estate practitioners. The supplemental reasons do, however, provide an opportunity to revisit the original trial reasons of Mr. Justice Mesbur at 2001 CarswellOnt 4067, 45 R.P.R. (3d) 109, 56 O.R. (3d) 447 (Ont. S.C.J.).

When the original reasons of Mr. Justice Mesbur were released, this annotator did not feel that the case was particularly interesting. However, since its release, Paramount Pictures has achieved notoriety (unwarranted, it is submitted) as "the case that refused to apply Goodyear". The reference, of course, is to the seminal decision of the Ontario Court of Appeal in Goodyear Canada Inc. v. Burnhamthorpe Square Inc., 21 R.P.R. (3d) 1, 1998 CarswellOnt 4156, [1998] O.J. No. 4426, 166 D.L.R. (4th) 625, 41 O.R. (3d) 321, 116 O.A.C. 1, 43 B.L.R. (2d) 1 (Ont. C.A.); leave to S.C.C. denied (1999), 243 N.R. 400 (note), 127 O.A.C. 400 (note) (S.C.C.). In Goodyear, a tenant of a long-term uneconomical lease succeeded in terminating that lease upon the taking of possession of the leased premises by the landlord's mortgagee (for a general discussion see Lem, "Understanding Goodyear: A Case Commentary on Goodyear Canada Inc. v. Burnhamthorpe Square Inc." (1998), 21 R.P.R. (3d) 38). In Paramount Pictures, Famous Players, as tenant, presumably also locked into a long-term uneconomical lease, sought to achieve a Goodyear-esque result by likewise purporting to terminate its lease upon the taking of possession by its landlord's mortgagee. According to citation notes in the trial decision of Mr. Justice Mesbur in Paramount Pictures, Goodyear was "not followed", and it is this remarkable conclusion (all the more remarkable given that Goodyear went all the way to the Supreme Court with leave denied) that fuelled the case's undeserved reputation. After all, what were we to make of this upstart trial bench deciding not to follow Goodyear? – 19 –

This annotator admits to being unaware of the exact distinction between a case "not being followed" and a case being "distinguished". Whatever that distinction may be, however, it is submitted that a careful reading of Mr. Justice Mesbur's reasons in Paramount Pictures leads one to conclude that, while the court in Paramount Pictures did not apply the result in Goodyear (i.e. the court did not permit the tenant to be released of its obligations under the long-term lease for want of privity with the mortgagee in possession), it did so only because the relevant facts in Paramount Pictures were entirely distinguishable from the relevant facts in Goodyear. In fact, by declining to apply the result in Goodyear to the facts in Paramount Pictures, Mr. Justice Mesbur does nothing but re-affirm the law of attornment and non-disturbance as set out by the Ontario Court of Appeal and the Supreme Court of Canada in Goodyear.

The facts in Paramount Pictures, although ostensibly similar to those in Goodyear, are diametrically opposed in one fundamental respect: in Goodyear, the lease ranked subordinate to the mortgage, whereas in Paramount Pictures, the lease in fact ranked prior to the mortgage. As Mr. Justice Mesbur rightly points out throughout his judgment, the comparative priority of the lease vis-à-vis the mortgage makes a world of difference in determining the tenant's rights and obligations under the lease after possession by the mortgagee.

The determination of the priority of the lease, in turn, was predicated entirely upon the doctrine of actual notice as set forth by the Supreme Court of Canada in Dominion Stores Ltd. v. United Trust Co., 1 R.P.R. 1, 1976 CarswellOnt 383, 1976 CarswellOnt 404, [1977] 2 S.C.R. 915, 71 D.L.R. (3d) 72, 11 N.R. 97 (S.C.C.). It is admittedly surprising to this annotator that neither counsel in Paramount Pictures apparently thought it necessary to raise United Trust in argument, even though the facts in Paramount Pictures were nearly identical to those in United Trust and the legal issue at stake in Paramount Pictures literally screamed out for the application of the doctrine of actual notice. The United Trust decision is, and has remained to date, the seminal authority for the proposition in Ontario that, notwithstanding the Land Titles Act, the priority of registration cannot supersede any unregistered interest actually known to a claimant hoping to invoke the registers for his or her priority (for a discussion of the various decisions framing the doctrine of actual notice under the Ontario Land Titles Act, see Lem, "Key Land Titles Cases You Need to Know: Land Titles and Equity - Shall the 'Twain Ever Meet?" Land Titles: It's Going to be the Only Game in Town, Canadian Bar Association (Ontario) - Continuing Legal Education, September 25, 2000, Toronto).

Like in United Trust, the Paramount Pictures case was also a lease situation. Mr. Justice Mesbur found that, as a matter of fact, the mortgagee had unequivocal actual notice of the tenant's lease when it acquired the reversionary estate as collateral. With such actual notice of the pre-existing lease, the mortgagee could not thereafter assert a priority over the unregistered interests of that tenant, even though the mortgagee had notional priority based on its registration, the absence of any registration by the tenant, and the literal reading of the Land Titles Act.

The impact of a finding of priority on the part of the tenant cannot be understated. If the lease in Paramount Pictures in fact ranked prior to the mortgage on title, then Paramount Pictures was taken out of the application of Goodyear altogether, and, instead, placed into the opposite paradigm. A tenant under a prior ranking lease simply cannot disaffirm the lease upon a foreclosure or possession of the reversion by any subsequent ranking mortgagee of the landlord. This explains why, especially in the United States, mortgage lenders often prefer simply to subordinate their security to the relevant material leases, using the operation of the common law rather than awkward subordination and non- disturbance agreements to achieve de facto attornment of the relevant tenants.

This annotator submits that Mr. Justice Mesbur's decision is entirely correct. That said, one has to query what might have happened had the tenant in Paramount Pictures actually registered its leasehold on title after the mortgagee had registered its security. There is an argument which suggests that United Trust is authority only for the proposition that a registered interest cannot defeat an unregistered interest of which the holder of the registered interest had actual notice before taking. However, so the argument goes, the same unregistered interest would then somehow be subordinated to all prior-ranking registered interests if the unregistered interest was ever subsequently registered on title!

This incredible theory was set forth in DeGasperis Muzzo Corp. v. 951685 Ontario Inc., 35 R.P.R. (3d) 243, 2000 CarswellOnt 3029 (Ont. S.C.J. [Commercial List]) and subsequently upheld on appeal at 42 – 20 –

R.P.R. (3d) 63, 2001 CarswellOnt 2285 (Ont. C.A.). This annotator is on record as suggesting that the rule in DeGasperis Muzzo simply cannot be the correct statement of the law (see the annotation to the trial decision in DeGasperis Muzzo in 35 R.P.R.). While it is trite that, absent equities between the registrants, registered interests must compete for relative priority against each other in a pure "race", "first in time to register" basis, it is respectfully submitted that it makes no sense to "punish" those with equitable priorities by effectively forcing them to forfeit such equitable priorities upon the eventual registration of their interests.

Applying the rule in DeGasperis Muzzo to the facts in Paramount Pictures yields peculiar results (actually, applying the rule in DeGasperis Muzzo to the facts in DeGasperis Muzzo yielded peculiar results as well!). On the DeGasperis Muzzo logic, had Famous Players, the tenant in Paramount Pictures, actually decided to register on title a notice of its lease after the mortgage had already been registered, the priority as between Famous Players, qua tenant, and the mortgagee would have been totally reversed, leaving Famous Players subordinate to the prior registered mortgage! As a subordinate ranking tenant, Famous Players would at least have met the threshold test for the application of Goodyear, and might very well have been able to end its obligations under the lease using a classic Goodyear argument!

Readers following this hypothetical with approval will no doubt feel that Famous Players could have, for the cost of a measly $50 registration, realized the significant savings of abandoning an uneconomical lease. Readers following the hypothetical with absolute incredulity might perhaps want to revisit the theoretical analysis in DeGasperis Muzzo. Of course, incredulous or not, readers are warned that the "because Jeff Lem said so" line of reasoning has not (yet) achieved doctrinal acceptance in Ontario courts, and the rule in DeGasperis Muzzo remains the law of the land in Ontario.

So, with the right set of circumstances, it would appear that tenants with unregistered leases that would otherwise have enjoyed priority over registered mortgages pursuant to the doctrine of actual notice (a là United Trust) may, at their unilateral option, still avail themselves of a Goodyear argument simply by subsequently registering their leases on title - a dangerous new complication to an already dangerous area of the law.

Jeffrey W. Lem

2001 CarswellOnt 4067

45 R.P.R. (3d) 109, 56 O.R. (3d) 447, 109 A.C.W.S. (3d) 653, [2001] O.T.C. 821

1420111 Ontario Ltd. v. Paramount Pictures (Canada) Inc.

1420111 Ontario Limited, Applicant and Paramount Pictures (Canada) Inc. and Famous Players Inc., Respondents

Ontario Superior Court of Justice

Mesbur J.

Heard: October 22, 2001 Judgment: November 15, 2001[FN*] Docket: 01-CV-213177

Counsel: Jeffrey W. Kramer, for Applicant Bruce S. Batist, for Respondents

Subject: Property

Landlord and tenant --- Term of lease — Termination — General principles – 21 –

In 1986 respondents made offer to owner of building to lease building to use as cinema — Offer to lease set out 20 year tenancy term ending in 2007 — Parties never entered into lease — After offer to lease was executed, owner mortgaged building and mortgagee had actual knowledge of respondents' tenancy — In 1997 mortgage went into default and respondents paid rent to mortgagee for next five years — In 2001 mortgagee sold building to applicant under power of sale — Applicant knew of respondents' tenancy prior to buying property — After abortive negotiations with third party for respondents to buy out balance of lease, respondents took position that lease had terminated in 1997 when mortgagee went into possession and from that point on tenancy was tenancy from year to year, requiring only 6 months' notice to terminate, which respondents purported to give — Applicants applied for order that offer to lease was valid and binding — Application granted — Mortgagee had actual notice of tenancy between respondents and owner and therefore lease, although unregistered, was not subsequent to mortgage as respondents contended — Effect of mortgage subsequent to lease is to convey reversion to mortgagee — When owner defaulted, mortgagee became owner of reversion and because assignment of reversion creates privity of estate, mortgagee had privity of estate with respondents without any further action in its part — Accordingly, lease continued to bind both mortgagee and respondents when mortgagee went into possession on default — When applicant acquired property under power of sale, it had actual notice of lease and therefore took property subject to it.

Mortgages --- Foreclosure — Final order — Effect of final order — Effect on lease

In 1986 respondents made offer to owner of building to lease building to use as cinema — Offer to lease set out 20 year tenancy term ending in 2007 — Parties never entered into lease — After offer to lease was executed, owner mortgaged building and mortgagee had actual knowledge of respondents' tenancy — In 1997 mortgage went into default and for next five years respondents paid rent to mortgagee — In 2001 mortgagee sold building to applicant under power of sale — Applicant knew of respondents' tenancy prior to buying property — After abortive negotiations with third party for respondents to buy out balance of lease, respondents took position that lease had terminated in 1997 when mortgagee went into possession and from that point on tenancy was tenancy from year to year requiring only 6 months' notice to terminate, which respondents purported to give — Applicants applied for order that offer to lease was valid and binding — Application granted — Mortgagee had actual notice of tenancy between respondents and owner and therefore lease, although unregistered, was not subsequent to mortgage as respondents contended — Effect of mortgage subsequent to lease is to convey reversion to mortgagee — Therefore, when owner defaulted, mortgagee became owner of reversion and because assignment of reversion creates privity of estate, mortgagee had privity of estate with respondents without any further action in its part — Accordingly, lease continued to bind both mortgagee and respondents when mortgagee went into possession on default — When applicant acquired property under power of sale, it had actual notice of lease and therefore took property subject to it.

Cases considered by Mesbur J.:

Dominion Stores Ltd. v. United Trust Co. (1976), [1977] 2 S.C.R. 915, 71 D.L.R. (3d) 72, 1 R.P.R. 1, 11 N.R. 97 (S.C.C.) — considered

Goodyear Canada Inc. v. Burnhamthorpe Square Inc., 1998 CarswellOnt 4156, 166 D.L.R. (4th) 625, 41 O.R. (3d) 321, 21 R.P.R. (3d) 1, 116 O.A.C. 1, 43 B.L.R. (2d) 1 (Ont. C.A.) — distinguished

Rogers v. Humphreys (1835), 111 E.R. 799 (Eng. K.B.) — referred to

Toronto Dominion Bank v. Ottlantis Inc., 1997 CarswellOnt 3691, 36 O.R. (3d) 119, 13 R.P.R. (3d) 15 (Ont. Gen. Div.) — distinguished

APPLICATION for order that offer to lease was valid and binding between parties.

Endorsement. Mesbur J.:

Nature of the proceeding: – 22 –

1 The applicant seeks an order determining that an offer to lease dated November 5, 1986 for a term ending in 2007 is valid, binding and subsisting between the parties, and a declaration that the respondents are bound by its terms. The respondents seek a declaration that the tenancy arrangement is between the applicant and Famous Players Inc. only, that it became a tenancy from year to year in 1997 when the mortgagee on the property went into possession, and is terminable on six months notice. They say they have given the requisite notice, and the tenancy will thus terminate at the end of February, 2002.

Background facts:

2 On November 5, 1986, Famous Players Limited (which is now known by the name Paramount Pictures (Canada) Inc.) made a comprehensive offer to lease from 661181 Ontario Inc. ("661") some premises in a building known municipally as 238-262 King Street West in Kitchener, Ontario. The premises were to be renovated, and ultimately used as a cinema. 661 accepted the offer, and after it completed the renovations of the premises as the offer required, Famous Players went into possession of the property, where it has operated a cinema ever since. The parties never entered into a lease, although draft leases were exchanged, in which the tenant is described as Famous Players Inc. The drafts were never signed. The offer to lease sets out a 20 year tenancy term, rental rates for the 4 five-year periods the tenancy would cover, and the obligations of the tenant regarding various expenses. The tenancy was to be what is commonly described as a "net-net lease", carefree to the landlord. There are no provisions in the offer to lease regarding assignment by the tenant, nor any specific provisions regarding the tenant's rights or obligations if a mortgagee were to take possession of the property.

3 By an agreement dated November 2, 1987 (its execution date is unclear), Famous Players Limited sold to Famous Players Inc. all its Canadian motion picture exhibition assets. Famous Players Inc. agreed to assume all the liabilities of Famous Players Limited, with certain exceptions that are not relevant to this application. The liabilities to be assumed specifically included leases and offers to lease. Famous Players Inc. agreed to indemnify Famous Players Limited from any liability on these matters. The Kitchener cinema is specifically referred to in the agreement as a "theatre leased by the vendor from third parties." Neither Famous Players Limited, nor Famous Players Inc. ever formally advised 661 of this transfer, obtained 661's consent, or a release of Famous Players Limited from its obligations under the offer to lease. There is no question, however, that the lease payments have been made by Famous Players Inc. and that 661 corresponded with Famous Players Inc. concerning the draft lease.

4 After the offer to lease was executed, 661 mortgaged the property in favour of Imperial Life. The mortgage was registered on August 30, 1988. From both a summary sheet dated June 2, 1988, found at Tab A, page 9 of the application record, and questions 76 to 77 of the transcript of the examination of Michael Ostfield on behalf of the respondents, it is clear Imperial Life had actual knowledge of the Famous Players tenancy when it granted the mortgage to 661, even though the offer to lease was not registered on title. At the same time as they granted the mortgage, Imperial Life and 661 entered into a General Assignment of Rents agreement, which is stated to be "as security for payment of the principal and interest and other moneys secured" by the mortgage. Imperial Life's right to collect rents is conditioned upon its giving notice to the tenants that they are required to pay rents to Imperial Life. In the agreement, 661 also authorizes Imperial Life on entry of the premises "to take over and assume the management, operation and maintenance of the Mortgaged Premises." The General Assignment of Rents agreement also contained a provision obliging 661 to assign any leases to Imperial Life, on Imperial Life's requesting the assignment. 661 appointed Imperial Life its attorney to effect the assignment, which remained in force as long as the mortgage debt remained unpaid, either in whole or in part.

5 In 1997, the mortgage went into default, and Imperial Life sent notices to pay rents to all the tenants under its General Assignment of Rents agreement. Imperial Life did not ask Famous Players to enter into an attornment agreement, sign an estoppel certificate or a non-disturbance agreement. Famous Players did, however, continue to pay rent to Imperial Life, on Imperial Life's executing an indemnity agreement with Famous Players, agreeing to repay the rents if it later transpired that Imperial was somehow not entitled to collect the rents. – 23 –

6 Imperial Life collected rents for some five years, and also entered into new leases with new tenants in the building. In these new leases, Imperial Life is specifically described as a "mortgagee in possession". In 1999 the building manger, ZMG, asked Famous Players to sign an estoppel certificate. Famous Players declined. In March of 2001, Imperial Life finally sold the building to 1420111 Ontario Limited ("142") under power of sale. The applicant, 142, is now the owner. Prior to the transfer in favour of 142 being registered, Imperial Life wrote to all the tenants in the building, advising them that the property was being transferred to 142.

7 There is no question 142 knew of Famous Players' tenancy prior to buying the property. In its offer to purchase the property from Imperial, it acknowledges the "as-is" basis of the transaction in clause 3.6, which refers to leasing status. In schedule D of the agreement, Imperial life specifically acknowledged the Famous Players tenancy. In February of 2001, Imperial Life assigned the Famous Players offer to lease to 142. In the material before me, 142 states that it relied on the existence of the Famous Players tenancy in deciding to buy the property. With rental of over $28,000 a month, Famous Players was the major tenant in the premises. In fact, the principal of 142, Ms. Laura Philp, knowing of changes in the movie business involving building huge mutiplex entertainment centres and closing of smaller theatres, approached the principals of Famous Players to see if they might be interested in buying out the balance of their lease. Their discussions involved a calculation based on the present value of the balance of the lease payments under the lease, discounted by 50%. On Ms. Philp's calculations, this figure was about $1.1 million. However, Famous Players was clear that any payment in the range of $1 million was a "non starter". They did not reach agreement.

8 It was after these discussions that Famous Players first took the position that its lease had terminated in 1997 when Imperial Life went into possession, and that from that point onward, its tenancy was simply a tenancy from year to year, requiring only 6 months' notice to terminate. In April of 2001, Famous Players articulated this position in writing to 142, giving notice of its intent to vacate the premises on February 28, 2002. That action has precipitated this application.

Analysis and the law:

9 The applicant's position is simple. It relies on the distinction between leases entered into before and after a mortgage. Here, the offer to lease was entered into before the mortgage. Since Famous Players went into possession, its offer to lease was no longer executory, but became a binding tenancy. The offer contains sufficient particularity to make it a binding lease. There was thus a binding lease in existence prior to the mortgage to Imperial Life. Falconbridge[FN1] discusses the distinction between leases entered into before and after a mortgage. At page 320, the text states:

If the owner of land free from encumbrance grants a lease of the land, and afterwards mortgages it, the mortgage affects merely the reversion retained by the mortgagor. The right of the lessee to possession in such case is paramount, and the rights of the mortgagee to possession and to have recourse to the land for recovery of the mortgage money are subject to the right of the lessee. A legal mortgagee becomes, however, the owner of the reversion subject to the mortgagor's right to redeem, and when the mortgagee becomes entitled to possession as against the mortgagor he may compel the tenant to pay rent to him instead of the mortgagor.

10 Falconbridge goes on to say the effect of a mortgage granted after a lease is to convey the reversion to the mortgagee, and no attornment of the part of the tenant is necessary in order to create the relation of landlord and tenant.

11 However, if a lease is granted after a mortgage, without the mortgagee's authority, the lease is merely a partial transfer of the equity of redemption. The mortgagee's rights are paramount, and the tenant's right to possession is subject to the mortgagee's right to take possession, and to have recourse to the land for recovery of the mortgage money. As the Court of Appeal held in Goodyear Canada Inc. v. Burnhamthorpe Square Inc.,[FN2] the leasehold interest created after the date of the mortgage was terminated when the mortgagee took possession of the premises. Here, however, the tenancy predated the mortgage.

12 Famous Players, now Paramount, seeks a declaration that the tenancy has been terminated. They rely on both Goodyear, above, and Toronto Dominion Bank v. Ottlantis Inc.,[FN3] to support their position. First, they argue that because their prior lease was unregistered, the law treats the – 24 – agreement to lease as if it had been registered after the mortgage. They rely on Ottlantis to support that proposition. Then, they argue, on the basis of Goodyear, the mortgagee's taking possession terminates the lease and thus there must be clear overt acts to create a new landlord and tenant relationship between themselves and Imperial Life. They submit that Imperial Life simply collecting rents was insufficient to create a landlord and tenant relationship on its own, other than a tenancy from year to year. This was the extent of the tenancy relationship the court had found in Goodyear.

13 Ottlantis, however, is distinguishable. There, the lease was entered into on July 16, 1984, and shortly after, the owner granted a mortgage on the property. The mortgage was registered on August 3, 1984, and the lease was registered on August 15, 1984. In Ottlantis, there was no discussion of the doctrine of actual notice and registration. The leases were treated as subsequent to the mortgage. It is not always true, however, that a prior unregistered interest will be subordinated. Although neither party referred to it, Dominion Stores Ltd. v. United Trust Co.[FN4] deals with this proposition. There, Dominion Stores was a tenant in a property, with an option to renew its lease for a further term. It gave notice it wished to exercise the option. United Trust purchased the property, and locked Dominion out even though it had actual notice of Dominion's lease prior to purchasing the property. The Supreme Court held that because United Trust had actual notice of the lease, it could not rely on the fact that Dominion's lease was not registered. The lease was treated as being in priority to the interests of United Trust, who took title subject to the terms of the lease.

14 Here Imperial Life had actual notice of the tenancy between Famous Players and 661. Under those circumstances, following the reasoning in United Trust, I find the lease is not subsequent to the mortgage. Imperial Life, as mortgagee, therefore took subject to the tenancy.

15 The respondents argue that Goodyear applies even if the lease is found to have priority over the mortgage. They argue that the assignment of a lease is not a substitute for a non-disturbance agreement and attornment agreement, which they argue are required to transfer the lease. They further submit there was nothing in the General Assignment of Rents Agreement that required the mortgagee to perform any of the obligations of a landlord, and hence the tenancy must be terminated. This analysis ignores the fact that the lease here was entered into prior to the owner granting the mortgage to Imperial Life. As Falconbridge states, the right of the lessee is paramount under these circumstances. The respondents suggested that this paramount right of the lessee includes a right to "choose" whether to remain bound by the lease or not, when a mortgagee goes into possession. The respondents could not, however, refer me to any case or text that supports this proposition. I must decline to apply it.

16 The respondents also argue that the lease was terminated when Imperial Life took possession on the mortgagor's default. They rely on Goodyear in support of this proposition. They submit that no landlord tenant relationship was created between them and Imperial Life, since they have neither privity of contract, nor privity of estate with Imperial Life. They submit that a mortgagee can be bound by a subsequent lease, if the lease is made with the mortgagee's express or implied consent. However, they quote Goodyear as saying the law is unclear whether the tenant would be bound to that lease without attorning to the mortgagee. Therefore the normal practice is for the parties to enter into non-disturbance agreements. Since there is no such agreement here, they reason, there is no binding tenancy between themselves and Imperial Life. This argument again ignores that here, the mortgage was entered into after the lease. As stated in Falconbridge, the effect of a mortgage subsequent to a lease is to convey the reversion to the mortgagee, and no attornment on the part of the tenant is necessary in order to create the relation of landlord and tenant. As long ago as 1835, in Rogers v. Humphreys[FN5], the courts have distinguished between tenancies that are created before or after a mortgage. The court in Humphreys held the where there is a prior lease, the mortgagee only has the same rights against the lessee as the mortgagor had. This is distinguished from the situation where the lease is entered into after a mortgage is granted. In that situation, there is no landlord-tenant relationship unless the parties choose to create one. This suggests that where a lease is entered into prior to a mortgage, the landlord-tenant relationship is continued when the mortgagee takes possession.

17 Relying on Goodyear, the respondents suggest that some kind of agreement between themselves and Imperial Life would have been necessary to continue the landlord-tenant relationship. The court in Goodyear discusses these different types of agreements, such as attornment agreements, non-disturbance agreements and the like, because there the lease came after the mortgage, and the – 25 – continued validity of the lease when the prior mortgagee took possession depended on the parties deliberately creating a landlord-tenant relationship. The respondents argue, following Goodyear, that the mortgagor would have had to assign the landlord's reversion interest in order to create privity of estate between the mortgagee and the tenant. They suggest that since the assignment of the lease from the landlord in favour of the mortgagees simply transferred the landlord's contractual rights, a non-disturbance agreement between the tenant and the mortgagor was necessary to create a landlord tenant relationship between them. Since there was no such agreement, they argue there is no privity of estate between them and the mortgagor, and thus no tenancy. However, where, as here, the lease predates the mortgage, the mortgagee is assigned the reversion. Thus, when the mortgagor defaults, the mortgagee becomes the owner of the reversion. Because an assignment of reversion creates privity of estate, Imperial Life had privity of estate with Famous Players, without any further action on its part. Thus, the lease continued to bind both Imperial and Famous Players when Imperial went into possession on default under the mortgage.

18 What then of the position of the applicants, who acquired the property under power of sale? A purchaser under power of sale, who acquires property with a prior lease, takes that property subject to that lease. If the lease was registered, all future purchasers would be deemed to have notice of it. Here, although the lease was not registered, the purchaser had actual notice of the lease, and is thus took the property subject to it.[FN6] Simply put, a power of sale does not affect a prior lease where the purchaser under the power of sale has actual knowledge of the lease's existence.

19 Thus, I conclude that the original lease remains valid and binding between the parties, and the respondents are bound by it. The remaining issue is whether Paramount Pictures (Canada) Inc. is the actual tenant. Although the various drafts of the lease describe the tenant as "Famous Players Inc.", no lease was ever executed. The tenancy agreement was created by the offer to lease, in which the tenant was Famous Players Limited. It is the only tenant. It has changed its name to Paramount Pictures (Canada) Inc. who becomes the tenant by operation of law.

Disposition:

20 For the reasons outlined above, an order will issue in terms of paragraphs 1(a) and (b) of the Notice of Application. If the parties are unable to agree on costs, they may make brief written submissions within 15 days of the release of this endorsement.

Application granted.

FN*. Additional reasons given 2001 CarswellOnt 4485 (Ont. S.C.J.).

FN1. W. B. Rayner and R. H. McLaren, Falconbridge On Mortgages, 4th ed. (Agincourt: Canada Law Book 1977)

FN2. [1998] O.J. No. 4426 (Ont. C.A.) ["Goodyear"]

FN3. [1997] O.J. No. 4033 (Ont. Gen. Div.) ["Ottlantis"]

FN4. (1976), 71 D.L.R. (3d) 72 (S.C.C.) ["United Trust"]

FN5. (1835), 111 E.R. 799 (Eng. K.B.), quoted in Falconbridge, supra note 1.

FN6. See United Trust, supra at note 4

8TH ANNUAL COURSE: PERFECT YOUR PPSA SKILLS

Blackacre Meets the Financing Statement: Real Property Issues and the PPSA – 26 –

Osgoode Professional Development Osgoode Hall Law School, York University

November 2, 2007

JEFFREY W. LEM

MILLER THOMSON, LLP

The interplay between personal property security and real property rights is not new, however, when these concepts collide, the priority analysis becomes confusing and complicated. What is worse, the priority analysis remains relatively fluid, with dramatic changes to the priority scheme (at least in Ontario) coming from relatively recent caselaw.

Real property owners have, as a matter of almost ancient common law1, a right to levy distress (a seizure and sale remedy as old as the teneurial system itself) against certain personal property2 of its tenants for and to the extent of unpaid rents. Distress can best be understood as a common law intrusion upon the carefully orchestrated personal property security scheme imposed by the Ontario Personal Property Security Act (the "PPSA"), in effect an offensive by "old guard" real estate doctrines into the "new" territory of the PPSA. However, real property owners also have, by definition, absolute common law rights in and to that which the common law classifies as real property (including that subset of real property commonly referred to as "fixtures"). Section 34 of the PPSA gives secured lenders limited seizure and removal rights in and to certain goods that were personality at one time, but that subsequently become fixtures. In contrast to distress, the fixture priority afforded by Section 34 of the PPSA can best be understood as a statutory intrusion upon the age-old real property scheme developed by the common law and, in effect, an offensive by the "upstart" PPSA onto the incumbent turf of real property.

This brief paper will examine both distress (Section "A") and Section 34 of the PPSA (Section "B") as well as the various priority issues that arise when each intrudes onto the law of the other. This paper will conclude with a brief commentary on the typical "landlord waiver agreements" that are often entered into between real property owners and secured creditors purporting to proactively rearrange and clarify otherwise competing issues before they become disputes (Section "C").

A. DISTRESS VS. SECURITY INTERESTS

The interplay between distress and security under the various personal property security regimes is an old topic.3 That said, the comparative priorities between a secured lender and a landlord has seen some unusually hectic consideration by Ontario courts of late, sufficient to warrant a recap of the law in light of such judicial activism.

1 Although, in many jurisdictions, these rights have been codified by statute. See, e.g., the Ontario Commercial Tenancies Act [Part IV of the former Landlord and Tenant Act has been repealed and reconstituted, together with certain other residential tenancy acts, in the Tenant Protection Act, S.O. 1997, c. 24. With the passage of the Tenant Protection Act, Parts I, II and III of the former Landlord and Tenant Act have been automatically continued as the Commercial Tenancies Act pursuant to s. 213(5) of the Tenant Protection Act)] (the "CTA"), but see also Alberta, which had landlord and tenant legislation, but repealed same in favour of the common law, yet kept certain procedural safeguards for distress.

2 Generally speaking, on site tangible personal property of the tenant, subject to a number of historic (and often curious) exemptions.

3 For an excellent earlier article on point, see Abraham Costin, "Priorities Between a Landlord's right of Distress and Other Interests", Who Takes Priority: Evaluating Lending and Security Practices, Insight Information Inc., 1993 but see also Jeffrey Lem and Andrea White, "Against All Comers: The Priority of Distress" in Haber, Distress: A Commerical Landlord's Remedy (2001, Canada Law Book). – 27 –

Distress versus The "Typical" Personal Property Security Interest:

An appropriate starting point for this analysis is to consider the relative priority of a duly perfected secured creditor with a "typical" security interest (i.e., a non-title-retentive security interest such as a general security agreement or a chattel mortgage)4 as against a properly effected distress (i.e. seized and sold) on the very same collateral.

This was the exact issue that came before the Ontario Court of Appeal in Leavere v. Port Colborne (City)5. Until certain issues were raised by the secured creditors in Leavere, it was widely unchallenged that Subsection 4(1) of the PPSA excludes the act from application to "a lien given by statute or rule of law". Since distress was widely regarded as "a lien given by statute or rule of law", it followed that the PPSA priority rules would not, therefore, apply in determining relative priority. Accordingly, as between a properly perfected typical secured creditor deriving its rights against a borrower cum tenant pursuant to the PPSA and a landlord6 levying distress in the same goods, the priority was determined as a "race of the swift", with the first to seize and sell the tenant's goods achieving priority over the other in respect of such personal property.

In Leavere, a secured creditor with a general security agreement duly perfected well before the local municipality had any arrears of business taxes in respect of which to distrain, sought to reverse the prevailing priority wisdom. At first, the secured creditor argued that distress was not in fact a "lien" within the meaning of the PPSA. If distress was not in fact a "lien", then the PPSA would again govern the borrower's personal property, and since the distrainor did not perfect its claims by registration in priority to the secured party, the distrainor's interest in those goods were, at best, unperfected claims, easily defeated by the perfected claims of the secured creditor. Mr. Justice Galligan made short shrift of this preliminary salvo, noting that Commercial Credit Corp. v. Harry D. Shields Ltd.7 was authority for the proposition that distress becomes "a lien given by statute or rule of law" (as contemplated by PPSA) at the moment of seizure. It followed, therefore, that the distrainor is not bound by the perfection or enforcement provisions of the PPSA8.

The second and arguably principal argument raised by counsel for the secured parties in Leavere, hinged entirely upon the construction of s. 20(1)(a) of the PPSA, which provides as follows:

Except as provided in subsection (3), until perfected, a security interest (a) in collateral is subordinate to the interest of (i) a person...who has a lien given by any other Act or by a rule of law or who has a priority under any other Act... [emphasis added]

4 Although the distinction between title retention and title charging appears to have lost its relevance in modern PPSA jurisprudence (see, e.g., Ziegel and Denomme, The Ontario Personal Property Security Act: Commentary and Analysis, 1994, Canada Law Book, at 31.5), it is still a distinction with meaning in the context of priority battles between landlords and secured creditors (see, infra).

5 22 O.R. (3d) 44 (C.A.), being a jointly heard appeal of Leavere v. Corporation of the City of Port Colborne and Merrell et al. v. A-Sung Holdings Ltd. et al.(1992), 11 M.P.L.R. (2d) 62, 3 P.P.S.A.C. (2d) 193 (Ont. Gen. Div.).

6 A critical presumption that is being made for the purposes of this article is that a municipality's right to distrain for business tax arrears (the rights being adjudicated in Leavere and a number of other cases referred to herein) is, for all intents and purposes, one and the same as a landlord's right to distrain for arrears of rent. This author makes the presumption with some confidence, on the strength of Mr. Justice Galligan's express analogy between a municipality's right of distress under s. 400(2) of the Municipal Act and a landlord's right of distress under s. 31 of the Landlord and Tenant Act (as it was then known).

7 15 R.P.R. 136, 29 O.R. (2d) 106.

8 An alternative finding on this point would have been a disaster for the landlords, requiring them to obtain security agreements from all tenants and register financing statements against all tenants well before default ever occurs. – 28 –

The secured parties in Leavere argued that, if a security interest is subordinate to a common law or statutory lien until perfected, then it should follow that a security interest will no longer be subordinate to a common law or statutory lien after the security interest is perfected. Since the secured parties had perfected their claims by registration, it was argued that the secured parties' claims naturally enjoyed priority over the lien arising out of the distress.

The Court of Appeal found the secured parties' argument "neat", but ultimately a non-sequiter. Instead, the Court of Appeal concluded that s. 20(1)(a) of the PPSA merely governed the relative priority of unperfected security interests versus liens, and could not be extrapolated to form the priority regime applicable between perfected security interests and liens. In other words, just because an unperfected security interest is always subordinate to a common law or statutory lien, it does not follow that a perfected security always ranks in priority to such a lien. 9

Finally, the secured parties posited that, if the PPSA did not govern, and if s. 20(1)(a) of the PPSA did not give them priority, then the court was relegated to a common law determination of priority. At common law, the rule of equitable priorities was always a "first to arise" concept. That is, if no other rules of conflict applied, then the creditor whose claim first arose would have priority. If the Court of Appeal accepted this proposition, then the secured parties in Leavere would rank ahead in priority to the distrainor because the secured parties had been granted their respective security interests in the goods long before the business taxes ever fell into arrears giving rise to the municipal distress.

The court ultimately rejects this analysis, and implies the requisite priority in favour of the distress through the following logic: (i) the legislation expressly permitted distress; (ii) such distress would be rendered "nugatory" if it were to be subject to all secured creditor claims in the same goods; therefore (iii) the legislation must have intended the distress lien to rank ahead of all secured PPSA claims. In the Court of Appeal's own words:

It would, in my view, amount to an absurdity if the statute authorized distress upon chattels covered by security agreements but did not intend as well that the lien created by the exercise of the right of distress was to have priority over the security agreements. The power to distrain upon chattels subject to security agreements would be rendered nugatory if the security agreements were not required to rank behind the liens which had arisen by rule of law. The legislature cannot have intended that the statutory right, which it granted, to distrain on such chattels was to be without effect [emphasis added].10

This author queries the Court of Appeal's answer to this, the third argument raised by the secured parties in Leavere11. Notwithstanding this author's concerns over the adequacy of the reply, Leavere is widely regarded as the

9 To analogize, it would be correct to say that "nobody is allowed to drive until the age of sixteen", but incorrect to deduce therefrom that "everybody at or over the age of sixteen is allowed to drive", because that argument ignores the various other tests and prerequisites that may apply to post- sixteen-year olds that would still have to be satisfied.

10 22 O.R. (3d) 53

11 With absolute respect to the Court, this logic does seem somewhat vulnerable to challenge, and this author has always considered this part of the judgement to have been the Achille's Heel of Leavere. The implication that distress should enjoy priority over perfected PPSA security interests simply because the authorizing legislation permits a municipality to distrain is not intuitively correct (see, e.g., Edmonton (City) v. Rohl (1963) 38 D.L.R. (2d) 41 (Alta. C.A.)). Furthermore, Exeter Public Utilities Commission v. Danbrie Moulded Plastics Ltd. et al 24 O.R. (3d) 858 is also illustrative. In the Exeter case, the Ontario Court (General Division [Divisional Court]) reviewed the relative priority of a public utility distress pursuant to s. 30(1) of the Public Utilities Act, now R.S.O. 1990, c. P.52. Like the municipal distress considered in Leavere, and the landlord and tenant distress considered in other decisions canvassed herein, there was no express reference to comparative priority in the Public Utilities Act. Unlike the Court of Appeal in Leavere, Mr. Justice Southy refused in Exeter to imply a deemed priority to the public utility commission's distress lien. Instead, Mr. Justice Southy found that the priority of the public utility commission's distress was to be governed strictly by the common law on a "first to arise" basis (to the chagrin, no doubt, of the public utility commission since the secured creditors had perfected their interests under the PPSA long before the utilities went into arrears). – 29 – authority, at least in Ontario, for the proposition that, typical (i.e. non-title-retentive) personal property security will rank subordinate to any effected landlord distress in the same goods.

Distress versus Conditional Sellers:

Historically, the right of a landlord to distrain was limited generally to goods actually owned by the tenant on the leased premises. Section 31(2) of the CTA provides:

A landlord shall not distrain for rent on the goods and chattels of any person except the tenant or person who is liable for the rent, although same are found on the premises; but this restriction does not apply in…favour of a person whose title is derived …by way of mortgage or otherwise…. or to the interest of the tenant in any goods or chattels on the premises in the possession of the tenant under a contract for purchase, or by which the tenant may or is to become the owner thereof upon performance of any condition…[emphasis added].

This meant that a landlord could distrain against the unencumbered goods actually owned by the tenant, as well as encumbered goods of the tenant (since such goods would either be owned by the tenant subject to a charge or by a secured party "…whose title is derived …by way of mortgage or otherwise…", depending upon which theory of security applies12). Conversely, however, the title in goods sold conditionally remains with the seller, and the secured creditor under a title-retention instrument does not actually derive title through the tenant. Instead, when it comes to conditionally sold goods, the CTA seems to only permit a landlord to distrain against "the interest of the tenant" in conditionally sold goods. The traditional analysis of this part of Section 31(2) of the CTA has always interpreted "the interest of the tenant" in conditionally sold goods as being the equity or paid-up component of the conditional sale contract, with the result that the landlord may distrain to the extent of such equity or distrain against the entire good, subject to buying out the balance owing under the conditional sale contract13.

Nothing in the Ontario Court of Appeal's decision in Leavere ought to have disturbed the general rule regarding the comparative priority between a distraining landlord and a conditional seller. In such a case, the secured creditor, not the landlord, is supposed to have priority (at least as to the unpaid portion of the sales contract). The decision in Leavere on its facts only dealt with a "typical" security interests (i.e. security interests where the creditor does not retain actual title to the collateral, such as, for example, a chattel mortgage or a general security agreement), and nothing in the ratio or in the obiter of Leavere spoke to the relative priorities of conditional sellers against their distraining competitors.

The problem, however, has been that Leavere has been occasionally over-extrapolated and simplified so that the case it now has a greater significance than it was originally intended to have. Although better known as a leading decision dealing with the comparative priorities of fixture financing provisions of the PPSA (see infra), the Ontario Court of Appeal's obiter in 859587 Ontario Ltd. v. Starmark Property Management Ltd.14 ("Atlantic") provides an excellent example of the mis-application of Leavere. In Atlantic, the "goods" in question was a large spray paint

12 Modern personal property security theory tends to speak in terms of liens and charges rather than as conveyances subject to an equity of redemption.

13 From a policy perspective, it is patently unacceptable to distinguish between title-retention and non-title-retention security, and the PPSA has long since negated any differences between the structuring of the security. It would, however, arguably be a worthy policy objective to give purchase money security interests ("PMSIs") some greater protection than other creditors including distraining landlords, in the same goods. Fortunately, title-retention security invariably is most often used to finance purchases, so it follows that legislation that carves title-retained goods out of the universe of distrainable goods, also indirectly provides priority protection over distress for at least some PMSIs, and therefore is a good result at law. What would, of course, be preferable, is a priority system that recognizes and affords PMSIs priority without the necessity that such PMSIs also be structured using the fiction of conditional sales contracts, and a number of jurisdictions have amended their legislation to achieve just such an effect (e.g. Saskatchewan)

14 [1998] 18 R.P.R. (3d) 201 – 30 – booth. At trial15, Mr. Justice Damont concluded that the spray booth was in fact a fixture, and not a chattel. At the Court of Appeal, Mr. Justice Doherty refused to overrule the trial judge's characterization of the spray booth as a fixture16, and further declined to hold that a landlord could levy distress against a trade fixture17. It followed, therefore, that Atlantic would not be a distress case.

Notwithstanding the foregoing, the Court of Appeal, now clearly venturing into obiter, went on to conclude, rather definitively, as follows:

If [the landlord could distrain]…[under the terms of s.4(1)(a) and s. 20(1)(a)(i) of the PPSA], that lien would have priority over the security interest of Atlantic which was unperfected when the distress occurred and the lien arose18

In reading Atlantic, it is critical to remember that the spray booth financing had been established as conditional sales contract. By the traditional analysis, the conditional seller in Atlantic (if the asset had been distrainable), should have won against any distrainor (at least to the extent of the unpaid amounts under its conditional sale contract), by virtue alone of the title-retention nature of its security. However, the Court of Appeal in Atlantic, by concluding (albeit in obiter) that Leavere would have applied to allow a landlord win (had Atlantic been decided on the basis of distress), seems to have cast into some doubt, perhaps inadvertently, the historic priority scheme which would have allowed conditional sellers to defeat distraining landlords.19

As it stands, it is difficult to advise a conditional seller or a landlord post-Atlantic. Although the Court of Appeal's priority comments were clearly obiter, Atlantic is now "out there" as a possible authority for the proposition that, at least as against distraining landlords, all secured creditors under the PPSA are treated alike, and conditional sellers and other title-retention secured creditors have arguably now lost their preferred priority position vis-à-vis their non- title-retention secured party counterparts.

Reversing the Reversing Rule:

The ratio in Leavere is limited in another way. The borrower cum taxpayer in Leavere was not bankrupt, and the priority dispute between the distraining municipality and the secured creditor with a general security agreement was decided within a non-bankruptcy framework. For the reasons described below, the analysis changes dramatically once the tenant is bankrupt.

The historical construct has always provided that, as confirmed in Leavere, a distraining landlord has priority over "typical" secured creditors when competing for the same goods and provided that the tenant cum borrower was not bankrupt. Once the tenant becomes bankrupt, however, the provisions of the Bankruptcy and Insolvency Act20 (the "BIA") apply to stay any "remedy against the insolvent person's property" then in progress. Distress is considered just

15 (1997), 34 O.R. (3d) 43; 10 R.P.R. (3d) 238; 12 P.P.S.A.C. (2d) 281)

16 Although, in fairness to Mr. Justice Doherty, he came very close to finding the spray booth to be a chattel.

17 The better view being that distress is only available against tangible personal property, and a fixture, even a trade fixture, is realty, not personalty. There is, however, some conflicting caselaw suggesting that a landlord can distrain against a trade fixture, and some of these cases were well canvassed by Mr. Justice Damont at trial.

18 18 R.P.R. (3d) 208

19 The ultimate result in Atlantic was that the conditional seller did defeat the landlord to the extent of the unpaid balance owing under the conditional sales contract, but decided outside of the rubric of distress. The irony, of course, is that, even if the asset had been distrainable, the result should have been exactly the same!

20 R.S.C. 1985, c.B-3, as amended. – 31 – such a remedy against the insolvent person's property within the meaning of the BIA21, so it followed, therefore, that, upon the bankruptcy of the tenant, any pending distress would be stayed. As the bankruptcy is played out, the secured creditor will collect outside of the bankruptcy22, while the distraining landlord will be left with a preferred claim23 for up to three months' of accelerated rent after the bankruptcy24. So, in the context of a bankruptcy, the distraining landlord actually loses priority to a typical secured creditor if the landlord cannot complete the distress before the petition into bankruptcy.

In fact, this rule was very well appreciated by insolvency lawyers25, and has frequently been referred to by the insolvency bar as the "reversing rule". In fact, it was common, when acting for secured creditors, to immediately petition tenants into bankruptcy when it was determined that a landlord may be levying distress. While it was always important to act quickly when retained by a secured lender under such circumstances 26, most insolvency practitioners presumed that they had the luxury of at least a few days from the day on which the assets in questions were first seized by the landlord levying distress. After all, Section 53 of the CTA required a minimum five (5) day hold period after seizure before a landlord could actually sell the distrained goods, and the case law27 then to date had always held that a distress that was stayed before the goods were actually sold (with money actually changing hands) would, for all intents and purposes, be a legal non-event.

Such sense of comfort was upset by the Ontario Court of Appeal decision in Canadian Imperial Bank of Commerce v. Canotek Development Corporation28 ("Canotek"). In Canotek, a landlord with arrears of rent anticipating an imminent petition of the tenant into bankruptcy and frustration at the hands of the reversing rule, levied distress quickly. However, rather than waiting the five days prescribed by the CTA, the landlord had a buyer in tow, and sold the distrained goods immediately, significantly truncating the usual distress process and thereby frustrating the corresponding opportunity for the tenant's secured creditors to petition bankruptcy and invoke the reversing rule against the landlord. Although there were a number of issues considered in Canotek, in the end, the Ontario Court of Appeal held that the distress was not void for its irregularity, and the landlord was not liable to the secured creditor for the losses arising from the frustration of the reversing rule.

The Court of Appeal in Canotek, speaking directly to the reversing rule, found the legal theory "artificial", concluding:

This is a tail-chasing type of priority problem which must be resolved by looking at the relationship between the true parties to the dispute. In this case, the bank never did have a priority over the landlord once the landlord distrained against the goods. The artificiality of looking to the bankruptcy

21 Section 69(1)(a) of the BIA.

22 Section 136(1) of the BIA.

23 The landlord's entitlement in bankruptcy is found in Section 136(f) of the BIA and ranks fifth in a series of "preferred" claims. Note that pursuant to Mr. Justice Maloney's decision in Re:Vrablik, 17 C.B.R. (3d) 152 a landlord does not have a separate claim in bankruptcy as an unsecured creditor in addition to what the landlord may recover pursuant to Section 136(f).

24 Accelerated rent is only recoverable to the extent that such accelerated rent is provided for in the lease.

25 See, e.g., Houlden & Morawetz, Bankruptcy and Insolvency Law of Canada, Volume 1 at p. 3-191 ff.

26 At the height of the early recession, petition documentation was prepared in blank, literally, to be pulled off the shelf and particularized quickly.

27 Re: Southern Fried Foods Ltd., (1976), 21 C.B.R. (N.S.) 267 (Ont. S.C.) 28 [1998] 13 R.P.R. (3d) 187 – 32 –

proceedings to give the bank something the law never intended it to have is obvious, and should not be countenanced by the court [emphasis added] 29

Based on the Court of Appeal's very clear words on point, it appears that a landlord in Ontario now has priority over a secured creditor claiming priority in the same goods merely by commencing a distress (including, presumably, constructive distress). Furthermore, that priority is preserved even if the distrained goods are ultimately sold without formal compliance with the hold periods contemplated by the CTA.

The Canotek decision finds good company in 1064521 Ontario Limited30 ("Giant Panda"), another municipal business tax distress case. In Giant Panda, the court arguably extended the doctrine set forth by the Court of Appeal in Canotek one step further. In Giant Panda, the municipal distrainor had, like in Canotek, commenced distress before the petition in bankruptcy, but, unlike in Canotek, had not completed a sale of the distrained goods (whether in compliance with the CTA or otherwise) before the bankruptcy. The Ontario Court General Division held that the municipality, simply by commencing distress (and notwithstanding that the distress had not been completed31) defeated the competing secured creditor. Although Mr. Justice Campbell in Giant Panda did not refer to Canotek, and although the analysis in Giant Panda varied somewhat from the Court of Appeal's reasoning in Canotek, the case did provide that a distraining municipality with an uncompleted distress still takes priority over unsecured creditors even in the event of bankruptcy32.

The holdings in Canotek and Giant Panda run expressly counter to the literal reading of s. 70(1) of the BIA, which normally exempts from stay only "...[actions] against the property of a bankrupt...that have been completely executed by payment to the creditor or his agent..." [emphasis added]. Although the actually holding in Canotek is "peculiar" given the Court of Appeal's findings on the issue of fraudulent preference (see infra), the unequivocal clarity of the Court of Appeal's finding on point in Canotek, the fact alone that Canotek was an appellate decision directly on point, and the support for the proposition in Giant Panda certainly suggests that the historic "reversing rule" has itself now been totally reversed in Ontario.

Distress as a Fraudulent Conveyance:

Also argued in Canotek was whether or not a distress by the landlord on the eve of bankruptcy constituted a fraudulent preference within the meaning of the BIA. Subsection 70(1) of the BIA provided generally that if an otherwise unsecured creditor manages to get paid before a bankruptcy, it gets to keep the payment received (what this author is fond of referring to as a "closers keepers, losers weepers" rule). Subsections 95(1) and (2) of the BIA generally deemed as impugned all transactions preferring one creditor over another made by a bankrupt within three

29 R.P.R. at 197.

30 18 R.P.R. (3d) 81

31 Prior to Giant Panda, the rule was fairly clear-cut in that an uncompleted distress (one where monies had not been paid for the purchase of the distrained goods) was a legal non-event. See Southern Fried Foods Ltd., Re (1976), 67 D.L.R. (3d) 599 (Ont. Bktcy.)

32 The avoidance of a detailed analysis of Giant Panda is deliberate, and some care should be exercised in citing Giant Panda. Although not overruled, and while it is a useful authority on the effects of incomplete distress, the General Division court in Giant Panda endorsed the principle that landlords exercising distress were defacto secured creditors for the purposes of the BIA. While that theory was popular for a while and manifested itself in a number of other Ontario decisions rendered at about the same time, the premise that a distrainor is a secured creditor for the purposes of a bankruptcy distribution is now largely discredited (see, generally, Re Pinestone Resort & Conference Centre Inc., (1999) 26 R.P.R. (3d) 229, 15 P.P.S.A.C. (2d) 1, 2 M.P.L.R. (3d) 1, 43 O.R. (3d) 594, 9 C.B.R. (4th) 159, 171 D.L.R. (4th) 426, 118 O.A.C. 338 (Ont. C.A.)). – 33 –

(3) months prior to the bankruptcy. The question before the court in Canotek was whether or not the landlord's distress constituted such a fraudulent preference.

The Court of Appeal concluded that the landlord's distress was in fact a fraudulent preference within the meaning of s. 95 of the Bankruptcy Act! Although there is, arguably, a very persuasive argument as to why distress simply cannot be a fraudulent preference33, the Court of Appeal went on to find that the fraudulent preference provisions of the Bankruptcy Act only voided the preference as against the trustee in bankruptcy, and not as against the secured creditor. In other words, a claim that a transaction should be voided as a fraudulent preference was only available to a trustee in bankruptcy and could not be raised by a secured creditor with an interest in the same goods! Accordingly, although the Court of Appeal had already concluded that the "reversing rule" had been reversed as between the secured creditor and the landlord, the trustee in bankruptcy could still "spoil the soup" by voiding the distress on behalf of the bankrupt estate34.

In Canotek, the proceeds of the distress were ultimately ordered handed over, not to the secured creditor, but rather, to the trustee in bankruptcy for distribution "...in accordance with s. 136 (a)-(f) of the Bankruptcy Act..." (i.e., as part of the residual estate existing after the secured parties have taken their share). The landlord, while it did not get to keep the distress proceeds, at least did not lose them to the secured creditor, and now stood the chance of recovering at least some of the monies as part of its preferred creditor claim. This peculiar result was hardly a total victory for the landlord (after all, a landlord's preferred claim is far from lucrative35), but the finding hurt the secured creditor far worse, and it would have been a total loss for the landlord had the Court of Appeal not overruled the "reversing rule" in place before Canotek36.

B. Section 34 of the PPSA

To this point, this paper has focussed on the comparative priorities of a distraining landlord against secured creditors, whether they be in the context of bankruptcy or outside of the context of bankruptcy. The Atlantic case, however, highlighted another battlefield upon which landlords have had to combat secured creditors for tenant assets.

33 It has always been this author's view that the test for a fraudulent preference must involve some sort of intent on the part of a debtor to favour one creditor over another. Presuming the absence of collusion, the exercise of a seizure and sale remedy by a creditor, be it distress or otherwise, simply cannot constitute the requisite fraudulent intent on the part of the debtor.

34 One interesting extrapolation of the Court of Appeal's take on fraudulent preference in Canotek would see even secured creditor's realization, so long as the remedy was exercised within three (3) months prior to the bankruptcy, similarly declared a fraudulent preference. There is nothing limiting the analysis to the landlord so, if the landlord had lost the "reversing rule" issue, one might have expected the Court of Appeal to void the preference to the secured creditor to ensure that the proceeds of the collateral reverted to the trustee in bankruptcy. If such an interpretation is a correct application of Canotek and is ever adopted in subsequent caselaw, then it does have the potential to seriously undermine the value of taking security in the first place.

35 Arrears of rent for a period of three months immediately preceding the bankruptcy and accelerated rent for a period not exceeding three months following the bankruptcy if such accelerated rent is provided for in the lease.

36 In fact, it would not be too great a leap to imagine collusion opportunities between landlords and tenants seeking to deprive secured creditors of their priority. A landlord and tenant could stage a distress opportunity to stay the secured creditor immediately prior to bankruptcy. While there would seem to be little benefit to a landlord for so doing, some marshalling of losses within a portfolio might, under the right circumstances, provide the needed incentive. – 34 –

Fixture Financing Profiled ~ The Atlantic Case:

Atlantic was, first and foremost, a dispute over fixtures37, and a consideration of the case serves as an excellent overview of the operation of Section 34 of the PPSA. Landlords have a right to levy distress against the chattels (only) of a tenant, but also has the right, generally, as owner of the freehold, to keep that freehold, including all fixtures forming a part thereof. Having concluded that the asset in question was a fixture, and, therefore, not distrainable, the Court of Appeal in Atlantic considered the landlord's claim to the spray booth qua landowner (cf. qua distrainor). If, as the landlord argued, the spray booth could not be distrained because it had become affixed to and now formed a part of the freehold, then the landlord should be entitled to the spray booth as of right as the owner of that freehold. Although not relevant in Atlantic, the same analysis would have been argued by encumbrancers of the fixture taking under or through the landlord (most typically, real property mortgagees), and, indeed, priority disputes over fixtures usually are fought by such real property mortgagees against competing personal property secured creditors.

Alas, the landlord in Atlantic had not countenanced the impact of Section 34 of the PPSA, which provides as follows:

(1) A security interest in goods that attached,

(a) before the goods became a fixture has priority as to the fixture over the claim of any person who has an interest in the real property; The concept of "attachment" under the PPSA is relatively simple, requiring only an execution of a security agreement, title in the hands of the debtor, and value given to the debtor38. In Atlantic, the security interest had in fact attached before the spray booth was installed, and the Court of Appeal rightly found that the secured creditor had priority over the landlord (i.e. the "person who had an interest in the real property").

The Atlantic decision did nothing to change the law in this regard. Arguably, however, prior to Atlantic, practitioners had not generally considered Section 34 of the PPSA as having application to the landlord and tenant context. Historically, Section 34 disputes had involved only mortgagees and secured creditors competing for fixtures that had been purchased on credit by the landowner. As Atlantic rightly points out, however, the unpaid fixtures of tenants also attracts the priority grab of secured lenders, all to the dismay of landlords.

Circular Priorities:

Because Section 34 of the PPSA gives priority to an attached security interest over then existing real property interests, all without the need for registration on title to the real property, it also lends itself to circular priority disputes. The Ontario Court of Appeal decision in GMS Securities Ltd. v. Rich-Wood Kitchens Ltd. 39 is the seminal decision on the type of circular priority that Section 34 of the PPSA tends to generate and is an interesting reflection on the judicial attitude to such priorities.

37 A good portion of the decision centered around a determination of whether or not the asset in question was a fixture, and then whether such asset was a "trade fixture" and, if so, whether that changed the analysis (it did not).

38 Section 11(2) of the PPSA.

39 77 O.L.R. (4th) 18. – 35 –

Although there were some additional facts in the Rich-Wood Kitchens case that were relevant to the decision40, the circular priority arose because a borrower had taken out a first mortgage from a conventional real property mortgagee to finance acquisition and construction of a house. The borrower then had some cabinet fixtures installed (all of which were unpaid for and secured by an attached security interest in favour of a fixture financier). Finally, the borrower took out a second mortgage on the real property, which second mortgagee advanced without notice of the cabinet maker's claim, as the fixture financier had not registered notice of its security interest on title before the second mortgagee advanced.

When enforcement ensued and the dust had settled, the fixture financier could claim priority over the first mortgagee since the security interest had attached and the first mortgagee was an existing real property interest. However, the fixture financier could not claim priority over the second mortgagee because the fixture financier had never registered its security interest on title and the second mortgagee took its interest after the security interest attached and otherwise without notice of the security interest. The "circularity" arises because under the real property statutes, the first mortgagee beat the second mortgagee in every respect, yet the introduction of the fixture financier now meant that the comparative priority as between real property interest inter se, was also reversed, with the second mortgagee collecting ahead of the first mortgagee to the extent of the PPSA lien.

In the end, the Court of Appeal awarded the sale proceeds first to the first mortgagee (after having deducted from such entitlement the full amount due to the fixture financier), with the balance to the second mortgagee. As a result, the real property priorities, even as between wholly real property litigants, were distorted to account for the Section 34 intrusion (again, had this been a pure real estate dispute, the first mortgagee would have collected in full in priority to the second mortgagee). While the circularity remains a conundrum, and one that the Court of Appeal freely conceded that it could not resolve without trammeling one or the other of the regimes, in the end, the Court of Appeal's compromise did in fact achieve what was arguably a fair commercial result.

C. AMENDING PRIORITIES: DRAFTING AND NEGOTIATING THE LANDLORD WAIVER

As a general observation, in part because of the priority vis-á-vis distress imposed by Leavere, secured creditors often will not lend to a tenant where the collateral is to be located in the tenant's leased premises, without first obtaining comfort from the borrower/tenant's landlords41. While the forms of these Landlord Waivers vary considerably from one secured creditor to another, most such Landlord Waivers have the following constituent components:

• estoppel language confirming the status of the lease from the landlord's perspective;

• a waiver of the landlord's right of distress;

• a waiver of the landlord's right to claim priority in fixtures;

• notice and a generous opportunity to cure the tenant's breaches (and sometimes an opportunity to take over the tenant's interest in the lease); and

• access by the secured creditor to the real property to remove the charged fixtures and chattels.

40 So, for instance, the first mortgage was advanced in tranches, and in fact the last tranche of the mortgage was advanced after attachment but before registration of the Section 34 claim on title to the real property. Accordingly, it was undisputed that the first mortgagee actually had priority to all parties embroiled in the litigation to the amount of its last tranche.

41 Although this documentation takes a myriad of forms, they are all collectively referred to herein as "Landlord's Waivers". – 36 –

The following is a brief summation of certain particular observations on each aspect of a typical Landlord Waiver.

Estoppel: There is generally no reason why a landlord ought not confirm the status of the lease, and the lease frequently provides for such estoppel comfort. That said, large landlords will typically note logistical inconveniences especially with frequent requests and will often limit either the circumstances or the frequency (or both) under which a tenant can compel the landlord to provide estoppel comfort. Furthermore, landlords will typically insist on some language to ensure that the certification is only that "there are no known material defaults under the lease to the best of the landlord's knowledge" or some such similar qualification..

Waiver of Distress: There is, of course, no legal reason why a landlord is required to waive its rights to distress. There is some considerable disagreement amongst leasing lawyers as to the usefulness and efficacy of distress as a landlord's remedy (although, frequently, the very threat of distress is an effective collection tool). Whatever the value of the remedy, it does not seem prudent for landlords to give it up unless the business case really calls for it. Typically, where the tenants is already in possession the tenant is not an anchor, and vacancies are relatively low, landlords are less likely to waive their distress rights to accommodate a tenant's financing. Conversely, where the tenant has not yet entered into a lease, the tenant is a major tenant, vacancies are relatively high, and there is some perceived need to lure the tenant in, then the waiver is generally more palatable to landlords. In either event, there is often some concession to be extracted from the tenant as the quid pro quo for the Landlord Waiver.

Waiver of Fixture Priority: The waiver of the landlord's claim in fixtures is somewhat of a different story. Like with distress, there is no legal reason why a landlord is required to waive its claim in fixtures. As discussed earlier in the paper, generally speaking, a landlord cannot distrain against goods that have become fixtures, and the landlord's real property claim in and to such fixtures will be subordinate to general security interest that have attached in the goods before such goods became fixtures. The secured creditors have priority in such goods (now fixtures) under the PPSA, together with a right to remove such fixtures, subject only to a duty to post security for the physical damage to be incurred in so doing. Accordingly, provisions in Landlord Waivers purporting to subordinate a landlord's claim in the fixtures really just mirror, more or less, the state of the law anyway. The redundancy is responded to in two different ways. Some landlords refuse to waive the interest in fixtures, arguing that the secured creditor already has it under the PPSA. Others take the view that, if they were otherwise prepared, for business reasons, to waive their right of distress, there would be no benefit in being obstructionist on the fixture front when the secured lender will probably win in the end anyway.

Notice and Opportunity to Cure: There is generally no reason why a landlord ought to object to give a secured lender notice of default and an opportunity to cure, although landlords to complain about the logistical problems associated with mandatory third party notice and object to extending opportunities to cure beyond what otherwise would have been enjoyed by the defaulting tenant. Landlord's will often insert language to the effect that the landlord will use only commercially reasonable efforts to give the notice and will not be liable if, for whatever reason (other than its deliberate act) the notice is not given.

Access: At law, a secured creditor can always, with a court order42, access leased premises to retrieve collateral properly belonging to it. Furthermore, these court orders are routinely available where the secured creditor can prove its entitlement to the goods, etc. The court orders do impose an added expense (including, sometimes, large deposit requirements) and delay to the secured lender, and the access permission is designed to facilitate a more expedient recovery by the secured creditor. The value of expeditious access varies with the nature of the collateral43. Logically, the issue of access should simply follow the decision on the waiver of distress. If the landlord is prepared, for business reasons, to waive its right to distress, then there is little to be gained in then denying the secured creditor ready access to the leased premises for the propose of realizing on the tenant's goods.

Difficulties in Negotiating Landlord Waivers

While third party documents are difficult to procure generally, the landlord waiver is particularly difficult to deliver for closing because there is typically very little to gain for landlords in agreeing to give up the rights typically requested of them. The lease is almost invariably already in place before the financing and is not contingent upon the financing.

42 Such court order would, presumably, arise as a general incidence of an action in replevin.

43 Perishable goods come immediately to mind, but other goods that are not perishable can also be quite time sensitive (e.g. DVDs and CDs of current releases, computers needed for ongoing operation, etc.). – 37 –

Moreover, the tenant cum borrower is typically in good standing under the lease and can be expected to remain in good standing with or without the financing giving rise to the requested landlord waiver. Although it is true that the landlord probably does not readily need its right of distress under such circumstances, the risk of actually harming the tenant to the point of losing a paying tenant by refusing to sign a landlord waiver is usually not acute enough to prompt the landlord to gratuitously give up its rights by signing the landlord waiver. Furthermore, at least for now, tenants rarely suggest that they pick one location over another because one landlord is more financing friendly than others.44 Further still, most leases, which are typically drafted by landlords in the first place, simply do not oblige the landlord to even consider postponing or waiving its right to distrain or to release its claim on fixtures45. As a veritable coup-de-grace, most lenders' forms of landlord waivers remain outrageously and sometimes offensively one-sided, without any recognition of the fact that landlords have little incentive to sign even a modest landlord waiver, let alone an aggressive version. These factors together mean that the tenant's lenders' demands for fixed priority over the tenant's chattels and fixtures all too often fall on deaf ears, and the job of the hapless lawyer assigned to procure such landlord waivers becomes a futile exercise.

The argument in favour of landlord waivers most frequently cited to landlords by their financing tenants is that it simply is in the best interest of the landlord to have a well financed tenant. If the landlord does not agree to give a landlord waiver to the tenant's financier, then the tenant will ultimately be unable to sustain itself at that location. This general argument is persuasive in certain circumstances. So, for instance, where the tenant is bordering on insolvency or is emerging from bankruptcy protection, there is often a sense of anxiety as to the tenant's future financial health that militates heavily in favour of generous landlord waivers. Certain industries generally also lend themselves to highly levered specialty tenants where, but for comprehensive landlord waivers, most such tenancies would either fail or never get off the ground.46

Bram Costin, in perhaps one of the best specific discussions on landlord waivers to date47, notes that:

Landlords have to face reality – tenants, especially retail and restaurant tenants, will finance their equipment and inventory – regardless of what the lease says or anything else. Once a landlord faces that reality, it is better off with a waiver agreement that clearly defines the respective rights of the landlord and the tenant's lender.48

44 This is beginning to change somewhat. The few landlords that have proven themselves to be reasonably flexible and accommodating, even when they are not legally or economically compelled to do so, are beginning to reap some of the benefit of their gratuitous goodwill. More and more, we are seeing tenants that are not specifically looking to finance nonetheless actively factoring in anticipated ease of negotiation (or, more accurately, the absence of grief) into their site selection criteria.

45 This too is beginning to change. More and more we are seeing leases being negotiated by tenants that have had the foresight to anticipate future inventory and equipment financing and are pre- negotiating landlord waivers in anticipation of their future lenders' demands.

46 Restaurants come to mind as being one such industry. It seems as if almost all restaurants, whether they be "ma & pa" type restaurants or national franchises, often require a significant amount of tenant financing of inventory and equipment. Furthermore, most landlords of retail and office premises seem resigned to the fact that they absolutely need restaurants for their projects. The combination means that landlord waivers are relatively common for restaurants. For an excellent discussion on leasing issues unique to the restaurant industry, see Michael S.Horowitz and Christina Kobi, Restaurant Leasing, "The Six-Minute Commercial Leasing Lawyer 2005", LSUC.

47 Abraham Costin, Landlord's Waiver – Facing Reality, "The Six-Minute Commercial Leasing Lawyer 2005", LSUC.

48 In fairness to Mr. Costin, he soon thereafter in his paper also notes that lenders have to be practical about recognizing that landlords get very little out of a tenant financing and, as such, should moderate their demands in landlord waivers accordingly. – 38 –

One of Mr. Costin's arguments (beyond mere certainty for certainty's sake), is that the landlord's principal claim to inventory and equipment is the age-old right of distress, and that distress itself has always been a potentially awkward and difficult remedy to effect. While the effectiveness of distress as a remedy is beyond the scope of this paper49, significant recent developments in the law of distress tend to support skepticism about the ultimate efficacy of distress50 as a landlord remedy. Whether these inherent infirmities in the remedy of distress are sufficient to bolster the "certainty" argument for landlord waivers is debatable, the vulnerability of distress as a remedy against inventory and equipment does militate towards a pre-determined contractual priority agreement between the creditors most likely to be competing with each other for the tenant's inventory and equipment.

Alternatives to the Landlord Waiver

There are two competing predictions for the future. On the one hand, it has been suggested that future leases will better anticipate the need for landlord waivers and will have minimum tenant financing accommodations negotiated in ab initio. If the world unfolds in this manner, one can expect landlord waivers to become more common, and landlord resistance thereto to ameliorate accordingly.51 Indeed, with continued progress in the Canadian law of third-party beneficiaries52, the day may come when the priorities currently addressed by way of landlord waivers can be authoritatively dealt with in the leases themselves, without the need for a freestanding contract between the lender and the landlord.

On the other hand, an alternative vision of the future sees the compromise in this zero-sum game coming from the lending side, rather than the landlord side, unfortunately at the expense of the tenant/borrower. Rather than posing landlord waivers as preconditions to advance, more and more lenders are prepared to advance on their equipment and inventory secured loans without any landlord waivers provided that the borrowing base under such loans are reduced to reflect the corresponding risks to the collateral posed by the landlords who will not waive their remedies.

The only question that does not seemed to have been determined is the appropriate quantification of this risk. Many secured creditors reduce the available credit by the value of the inventory and equipment located at each location demised by a non-waiving landlord. This approach, however, is arguably overly defensive in most circumstances and needlessly punishes the borrower cum tenant most of the time. Since the competing interest threatening priority over the lender's equipment and inventory collateral is typically distress, the actual reduction of credit under the tenant's lender's facility should actually be a proxy of the worst-case-scenario distress situation. In other words, the priority risk has no correlation to the value of the inventory and equipment actually stored at the leased premises, and everything to do with the rent (an other fees) payable for the leased premises. The greater the rent for the premises, the higher the holdback or borrowing base reduction can justifiably be, and this would be entirely irrespective of the value of the equipment and the inventory stored at that location.

Consider, for example, a location that stores extremely valuable inventory but with comparatively low rent. It would be inconsistent with the risk faced by the equipment and inventory lender to simply deduct the value of the inventory from the available credit. Instead, to be reflective of the risk involved, the lender should first determine what it believes to be a reasonable assessment of how long that particular landlord would allow rents to fall into arrears before considering enforcement. It is unclear what that number might be, but it would be rare to see a commercial landlord allow more than, say, three months of rent to fall into arrears before exercising some remedy. The product of: (i) those number of months; and (ii) the monthly base rent and other fees owed under the lease (in other words,

49 See, generally, Harvey Haber, Ed., Distress: A Commercial Landlord's Remedy (2001) Canada Law Book, but see also the excellent discussion on practical difficulties in levying distress in Theodore B. Rotenberg, "Honey, I Shrunk the Lease: A Case Comment on Falwyn Investors Group Ltd. v. GPM Real Property (6) Ltd.", 22 R.P.R. (3d) 15.

50 Although not specifically cited by Mr. Costin, the Ontario Court of Appeal decision in Canotek is illustrative of the continuing uncertainty that surrounds distress.

51 Not unlike lenders that have become much more comfortable with non-disturbance agreements post- Goodyear.

52 See, generally, recent developments in the ability of third parties to enforce contracts to which they are not party in Kuhne & Nagel, [1992] 3. S.C.R. 299 – 39 – the rent payable over the entirety of the likely risk window) would then form the basis of any reduction in the available credit by the equipment and inventory lender because the landlord's priority over the secured lender, being based for the most part in distress, cannot exceed this amount. This formula yields the maximum distress over that period.

This is not to suggest that secured lenders ought not reduce the borrowing base by the value of all of the inventory stored at leased locations that do not have comprehensive landlord waiver agreements. That is a business decision that the parties are free to negotiate. All that this author is suggesting is that both parties have to understand the risk that they are guarding against and make their credit decisions accordingly. In some instances, the value of the inventory stored at leased locations without the benefit of comprehensive landlord waivers will approach the actual dollar risk from landlord distress and, as such, would be a useful proxy from which to quantify the impact of such risk. That said, the reducing the borrowing base by the value of all such inventory, without an analysis of the underlying distress risk, would be disingenuous and misleading and ultimately a disservice to both parties. Stack v. Eaton Revisited: Towards a Definition of Fixture

PPSA for Real Estate and Business Lawyers Best Practices for Secured Transactions Involving Personalty and Realty October 18, 2005 Donald Lamont Learning Centre Osgoode Hall, Toronto

By Jeffrey W. Lem

The law with respect to fixtures is captured in the latin maxim quicquid plantatur solo, solo cedit53, judicially having been translated as "whatever is fixed to the freehold of land becomes part of the freehold".54 That is, once an article of personalty is attached to land, it loses its characteristics of chattel and thereafter assumes the legal characteristics of land. The concept is simple enough, but the search for clear lines of demarcation between fixtures and personalty remain elusive.

On Stack v. Eaton: Not a Helpful Test:

1. That articles not otherwise attached to the land than by their own weight are not to be considered as part of the land, unless the circumstances are such as shew that they were intended to be part of the land.

2. That articles affixed to the land even slightly are to be considered part of the land unless the circumstances are such as to shew that they were intended to continue chattels.

3. That the circumstances necessary to be shewn to alter the prima facie character of the articles are circumstances which shew the degree of annexation and object of such annexation, which are patent to all to see.

4. That the intention of the person affixing the article to the soil is material only so far as it can be presumed from the degree and object of the annexation.

5. That, even in the case of tenants' fixtures put in for the purposes of trade, they form part of the freehold, with the right, however, to the tenant, as between him and his landlord, to bring them back to the state of chattels

53 See A. H. Oosterhoff and W. B. Rayner, Anger and Hornsberger Law of Real Property, (2d ed.), Vol. 2, (Toronto: Canada Law Book Inc., 1985) at 1008. 54 Ibid. See also Bain v. Brand (1876), 1 App. Cas. 762 (H.L.), at p. 767 and Montague v. Lang (1972) 24 P. & C.R. 240. – 40 –

again by severing them from the soil, and that they pass by a conveyance of the land as part of it, subject to this right of the tenant.

The Compilation Approach:

The test as to whether or not a chattel has become a fixture is expressed in voluminous case law dating back four centuries. The following is an attempt at summarizing the centuries of caselaw into workable principles:

1. Benefit to the Fee: An article affixed to the land may have become a fixture depending upon the intent of the party affixing the article to the land. Generally, if the intent was to benefit or enhance the land, then the article is a fixture.

2. Presumption in Favour of Fixture: Any article affixed to the land, even slightly, will be presumed a fixture55, which presumption is rebuttable with evidence of intent that the article was not intended to be a fixture, the onus of establishing such intent being on the party alleging that the article had not become a fixture.56

3. Test of Intent: The test of such intent is objective, not subjective57, so that an article may become a fixture even though the party affixing the article did not personally intend for the article to become a fixture.58

4. Affixation: An article affixed to the land so firmly that it cannot be removed without great damage to the land to which it is affixed is conclusively presumed to have been intended to have been a fixture, which presumption cannot be rebutted.59

5. Nature of Article: Where such intent is at issue (i.e., where the article is not so absolutely affixed as to be irrebuttably presumed a fixture), the courts will look to factors such as the degree, method and circumstances relating to the affixation of the article as well as the nature and purpose of the article itself in determining whether there existed the requisite intent to rebut the presumption that the article had become a fixture.60

The Distillation Approach – A Simple Two-Part Test:

Some may argue that the compilation approach is only marginally better than the original formulation in Stack v. Eaton and there is an argument that the case law is better expressed as a core set of tests, in respect of which all other "tests" are merely re-expressions or variations or subtests thereof. With this mandate in mind, the Ontario cases that have been decided after Stack v. Eaton, although expressly citing Stack v. Eaton, seem to have adopted, instead, the following two-branch version of the test:

1. The degree of affixation: The more portable and less permanently affixed the article is to the building, the greater the article's likelihood of remaining a chattel instead of becoming a fixture. Conversely, the less portable and more permanently affixed the article is to the building, the greater the article's likelihood of becoming a fixture rather than remaining a chattel.

2. The purpose of affixation: The more it appears as if the article was affixed to the building for the purposes of making the article function better, then the greater the article's likelihood of remaining a chattel instead of becoming a fixture. Conversely, the more it appears as if the article was affixed to the building for the

55 Stack v. T. Eaton Co. (1902), 4 O.L.R. 335, at 338. See also LaSalle Recreations Ltd. v. Candex Invt. Ltd. (1969), 68 W.W.R. 339, at 344-45 (B.C.C.A.). 56 See C. Bentley, J. McNair and M. Butkus, Williams & Rhodes Canadian Law of Landlord & Tenant, 6th Ed., Vol. 2 (Toronto: Carswell, 1988), at p. 13-15. See e.g. Holland v. Hodgson (1872) L.R. 7 C.P. 328, Ex Ch, at 334-335. 57 See Stack v. T. Eaton Co., supra, at 338. 58 Hobson v. Gorringe, [1897] 1 Ch. 182 (C.A.), at p. 191, 192 approved in Reynolds v. Ashby & Son, [1904] A.C. 466 (H.L.). 59 Oosterhoff and Rayner, supra, at 1012. 60 Reynolds v. Ashby, supra at 474. – 41 –

purposes of making the building itself more suitable for the building's intended purpose, then the greater the article's likelihood of becoming a fixture rather than remaining a chattel.

Dynex Petroleum: The Importance of Intent or Just Bad Law:

The Supreme Court of Canada's decision in Bank of Montreal v. Dynex Petroleum Ltd.61, is a "landmark" case and a "must read" for all practitioners of oil, gas and mining law. First and foremost, it settles, probably once and for all, the seemingly long-standing debate over the juridical nature of oil and gas royalties (which, judging from the extensive jurisprudence and academic commentary leading up to the Dynex Petroleum litigation, seems to have enjoyed somewhat of a mixed pedigree). Although the implications of Dynex Petroleum may ultimately extend far beyond oil and gas royalties in scope and Alberta in jurisdiction, the whole oil and gas industry that gives rise to the Dynex Petroleum litigation is uniquely associated with Alberta, and it is fitting that the Supreme Court's reasons for this appeal from the Alberta Court of Appeal is delivered by none other than Mr. Justice John Major, himself an alumnist of the Alberta judiciary.

In a well written decision, Mr. Justice Major concludes that royalties can, in fact, be interests in real property if the owner of the working interest and the owner of the royalty entitlement intended that the royalties constituted a right in the unproduced minerals in situ. In so doing, Mr. Justice Major considers and then rejects the age-old common law rule that any interest issuing from an incorporeal hereditament cannot, in and of itself, become, or constitute an interest in, real property.

The principal practical consequence of such a finding is, of course, that the title to the royalties and the relative priorities of the royalties vis-à-vis other encumbrances of the land can now be governed by the race or race-notice provisions of the applicable real property title registration regimes. This was precisely the issue adjudicated in Dynex Petroleum. From a strictly policy perspective, this is not such a terrible result since minerals in situ are, by nature, permanently situated and well suited to a legal description or address driven search engine like a real property register. Furthermore, it seems as if the practice of protecting royalties by the registration of caveats under the real property legislation was already a well ensconsed customary protocol for protecting royalties long before Dynex Petroleum was decided.

The endorsement of the Dynex Petroleum decision does not come without certain caveats of its own. First of all, this author is not entirely comfortable with the assertion that a property interest is either real or personal depending upon the intent of the parties creating the interest. The whole concept that the intent of the immediate parties to the conveyance (and yes, "conveyance" would be a technically appropriate term for a transfer of an interest in land) governs the juridical nature of the interest is somewhat troubling, especially given that it is precisely third parties (i.e. parties not involved in the creation of the interest) that most desperately need the protection of objective rules by which to determine whether a given interest is real or personal (in order to search and register appropriately). The immediate parties to the conveyance are bound to each other in contract, if nothing else, and do not typically need, as against each other, to distinguish between real and personal property being conveyed.

This author also admits to being somewhat confused with the Supreme Court's assertion that "[r]oyalties, as used in the oil and gas industry, make sense only if they are property interests in unproduced minerals [in situ]." Although this author has no familiarity whatsoever with the business practices surrounding the granting of royalties, this author intuitively comes to the opposite conclusion: royalties make no sense if they are property interests in unproduced minerals in situ. If a royalty truly was an undivided percentage right in the minerals, that would make it something like a defacto assignment of an undivided fractional interest in the working interest itself. Instead, royalties seem somewhat more akin to promises given by the owner of the working interest to pay certain unspecified amounts for certain period(s), the exact quantum of each such payment being a direct function of the total amount extracted during such period(s). It might be illustrative to consider what might be the case if the owner of the working interest fails to extract any minerals, oil or gas notwithstanding its working interest, or extracts same inefficiently or incompetently. Is there then some remedy by royalty holders to seize the working interest and extract the riches themselves? If royalties are truly "property rights in unproduced minerals" one would expect that type of remedy. If, however, there is no such right on the part of royalty holders to seize and work the working interest themselves, then the royalty would look much like any other unsecured promise to pay.

Although probably considered a "win" for royalty owners generally (certainly the holding in Dynex Petroleum favoured the royalty owners who had registered their respective caveats on title long before competing real property lenders),

61 2002 CarswellAlta 55 2002 CSC 7, 2002 CarswellAlta 54, 208 D.L.R. (4th) 155, 281 N.R. 113, 30 C.B.R. (4th) 168, 2002 SCC 7, 19 B.L.R. (3d) 159 – 42 – the finding may ultimately prove to be a "double-edged sword" for royalty owners. So, while Dynex Petroleum validates the process of registering caveats at land registry offices to perfect and preserve priorities in royalties, by confirming that a royalty can be an interest in land if the language manifests such an intent, the law after Dynex Petroleum pretty well mandates that such royalties must always now be registered on title lest priority or title be lost. Furthermore, query whether all of the implications of such a finding have percolated through the oil and gas industry. For instance, but without limitation: what are the potential tax consequences?; does the Statute of Frauds now apply to royalty deals?; and what are the appropriate limitation periods for enforcing royalties?

This author also notes that it may be possible to export the ratio in Dynex Petroleum beyond the confines of oil and gas royalties, as there is nothing in the reasons that limits the finding to just royalties. According to Dynex Petroleum, interests issuing from any incorporeal hereditaments can be interests in land, depending upon manifested intent. Although it is not immediately clear to this author what the long term implications of a wide- spread application of the ratio in Dynex Petroleum might be, it is interesting to note that, aside from a profit à pendre, the largest body of recognized incorporeal hereditaments is actually easements. Could it be that rights issuing out of or in respect of easements can now also be interests in land capable of binding the fee owner?

An Analysis of Certain Component Subtests:

1. Absolute Affixation: While a great deal of the case law with respect to fixtures deals with the intention of parties in respect of the installation of any particular article, it must be noted that the common law has consistently held that where an article is affixed so securely and so firmly that the only way of removing that article is to demolish or substantially damage freehold land or buildings, such affixation is absolute proof positive that the intention of the parties must have been to constitute the article in question a fixture, and therefore, realty.62

2. Degree, Method and Circumstances of Affixation: The courts have held, however, that where chattels are bolted down solely for the purposes of the better use and enjoyment of the chattels qua chattels (cf. benefiting or enhancing the land), those chattels are not necessarily to be considered fixtures simply on account of such fastening.63 For instance, a wet bar installed in a hotel which was clearly intended to remain equipment64, and a portable mining stamp mill secured to the ground for stability purposes65, were not to be fixtures notwithstanding they were fastened to the land.

Nonetheless, the courts have also held that, even if the primary intent of such affixation is to better secure equipment in order to further the usefulness of the equipment as equipment, such intent is not necessarily inconsistent with an intent to affix that equipment to the freehold as a fixture. So, for instance, while machines in a factory were clearly bolted down to steady them from vibrating, the courts have still held that such affixation was also consistent with an intent to permanently improve the freehold. 66

3. Nature and Purpose of the Article: Another subtest of the intention of the person installing the article in question relates to the nature and purpose of the article itself (as opposed to its affixation). That is, articles which are, by their nature, improvements to the use of the land as land (in this context, the reader is reminded to view land as being both land and building) tend to be viewed by the courts as having become fixtures. For instance, a furnace, no matter how marginally affixed, will be viewed as a fixture and not a chattel because the nature and purpose of a furnace is to improve the enjoyment and value of a building.67

The test relating to the nature of the article is further narrowed in the case of purpose-specific land. That is, where the land's value is derived primarily from its application to a specific purpose, then the test with respect to the nature of articles on the land will be linked to the specific purpose of that land. So, for instance, where the freehold was specifically used as a flour mill, courts have held that the mill stone, although only marginally affixed and easily removed from the balance of the freehold, was a fixture because

62 Oosterhoff and Rayner, supra, at 1023. See e.g. Wake and Wake v. Hall (1883), 8 App. Cas. 195 (H.L.), at 204; Gibson v. Hammersmith and City Ry. Co. (1862), 62 E.R. 748, at 750. 63 Haggart v. The Town of Brampton (1897), 28 S.C.R. 174, at 182; LaSalle Recreations Ltd. v. Camdex, supra. 64 Gregik Invt. Ltd. v. Clovell (1982), 22 Sask. R. 177 (Q.B.). 65 Liscombe Falls Gold Mining Co. and Brownell v. Bishop and Maguire (1905), 35 S.C.R. 539, at 541. 66 Haggart v. The Town of Brampton, supra; Longbottom v. Barry (1869), L.R. 5 Q.B. 123. 67 Andrews v. Brown (1909), 19 Man. L.R. 4. – 43 –

the nature of a mill stone could only have been to improve a mill.68 Similarly, docks and dock accessories in the context of a riverside warehouse69, chairs fastened to a theatre70, equipment bolted into position to a factory floor in the context of the sale of that factory71 and hay fork assemblies attached to a barn72, have all been held to be fixture, in part because the nature of such articles could only have been such as to further the purpose of the free hold to which they were attached.

(a) the building was not specifically built in a "custom fashion" to accommodate or support the article, or for a "singular or dedicated purpose" that involves the article, or as a "shell" for the article;

(b) the building and the article do not together have the appearance of a homogeneous unit, integrated into each other as part of a substantial interconnected process or function (as opposed to a conglomeration of individual items); and

(c) the basic business purpose of the building would not be materially eroded if the article were to be removed, and substantial reconstruction would not be required if the article were in fact removed and another use for the building was adopted.

Bowling Alleys – A Case Study:

Curiously enough, bowling alleys have proven to be an interesting battle ground over which to test the competing theories by which the law discerns a fixture from realty. The twin decisions of North West Trust Co. v. Rezyn Developments Inc.73, and Re Davis74are illustrative. Both decisions addressed the juridical nature of bowling alley equipment. The more modern British Columbia decision, Rezyn, found bowling alley equipment to constitute fixtures instead of chattels, a conclusion that ran 180 degrees counter to the holding arrived at by the Ontario High Court in Davis some fifty years earlier in respect of substantially similar bowling alley equipment. Although Rezyn is not an Ontario decision, it is an appellate decision, provides a significantly more thorough analysis of the issue than did Davis, and is a much more modern decision than Re Davis. This author is of the view that, were similar facts to be adjudicated again in Ontario, Rezyn, not Davis, would govern.

In Rezyn, the articles included: "reconditioned bowling lane beds, starshields, foul lights, ball return apparatus, bowlers & scorers, 300 pairs of leather rental shoes, automatic pinsetters, set pins, set bands, balls, pit cushions, and fab stools". The case provides an exhaustive overview of the Tests and explicitly rejects Re Davis (see below) because, according to the British Columbia Court of Appeal, Re Davis focussed too narrowly on the "degree of affixation" Test without taking into account the "purpose of affixation" Test. The Court in Rezyn elaborates on the application of the Tests as follows:

Affixation was permanent in the sense that they were to remain in place until worn out. Although the lanes and associated equipment were clearly removable, there was no evidence to suggest that they were intended to be portable…The building was built for a 'dedicated purpose', it was not a 'shell'…the concrete slab under the lanes was specially designed to support those lanes. In addition, the ceiling had a special 'saw-tooth' configuration; the business purpose of the building would be largely eroded if the lanes were removed; substantial reconstruction would be required if the lanes were removed and another use adopted; the lanes and associated equipment were part of a substantial interconnected process or function from seats and scoreboards to apron, lanes, pin setters and ball returns…

In Re Davis, the collateral description was less detailed, consisting only of "6 bowling alleys", but for the purposes of this analysis, we can presume that the equipment was largely the same as to fundamental characteristics. This

68 Moody v. Steggles (1879), 12 Ch. D. 261, at 267. 69 Grier v. The Queen (1894), 4 Ex. C.R. 168. 70 Lyon & Co. v. London City & Midland Bank, [1903] 2 K.B. 135; Berlin Interiors Hardware Co. v. Colonial Invt. and Loan Co., (1918), 38 D.L.R. 643. 71 Bacon v. Rice Lewis and Son (1897), 33 C.L.J. 680 (Ont.). 72 McCarthy v. McCarthy (1900), 20 C.L.T. Occ. N. 211 (C.A.). 73 (1991), 81 D.L.R. (4th) 751 (B.C. C.A.) 74 (1954) O.W.N. 187 (Ont. H.C.) – 44 – decision comes to a conclusion for bowling alleys were merely chattels since they designed so that they could be removed and re-installed elsewhere. The Court reasons as follows:

bowling alleys affixed "…by bolts or clips to a number of boards or stringers which raised the alleys about 6 inches above the floor, and on the unfastening of the bolts or clips they were capable of being broken down into sections to facilitate removal if desired…the degree of affixation of these bowling-alleys was not of much permanency and that their removal was a matter of comparative ease. It must be realized that this type of equipment, to use a very broad word, is regularly sold on conditional sales contracts, the contemplation of both vendor and purchaser being that the equipment may be removed on default.

This is directly opposite to the conclusion in Rezyn and is criticized both at trial and at appeal in Rezyn for having focused entirely on the "degree of affixation" Test without taking into account the "purpose of affixation" Test. This author submits that the different approaches are not regionally driven, since Rezyn provides an excellent analysis of the Canadian common law using many Ontario and other extra-provincial cases. Instead, this author sees the Rezyn versus Re Davies dichotomy as an indication of judicial evolution in the nearly 40 years that had passed between the two cases and a clear indication of the evolving trend in the law to favour a "purpose of affixation" test over the "degree of affixation".

Other Heavy Equipment Cases:

So, while there are many Canadian decisions considering the judicial character of objects that are fairly generic building components and machines that would invariably be found in almost any building (e.g. fixed shelving and light fixtures (Stack v. T. Eaton Co.75); forced air gas furnaces, gas heaters, electric base board heaters, air conditioners (Pezzack v. Irving Bank Canada76); pre-fabricated installed cabinets (Rich-Wood Kitchens Ltd. v. National Trust Co.77); broadloom carpeting (LaSalle Recreations Ltd. v. Canadian Camdex Investments Ltd.,78), these cases are not that helpful in developing legal tests for the characterization of fixtures. While these cases are illustrative of the application of the Tests generally, there is little credible argument suggesting that the articles in dispute in these cases were anything but fixtures. As such they are not nearly as interesting or helpful as the modern cases involving heavy equipment and machinery in delineating the borderline fixture cases.

For instance, in Deloitte & Touche Inc. v. 1035839 Ontario Inc.,79 the Ontario Court (General Division) considered the nature of a chlorine bleach processing plant, and, in particular, industrial piping and machinery the forming part of the production process, together with equipment which are ancillary to the central plant such as the safety equipment, lab equipment, and spare parts. The Court found that the articles, including the spare parts, were all fixtures. What was notable was that the equipment was relatively lightly affixed in all but one or two parts (mainly to preserve the integrity of the floor lining) and in some cases were clearly not affixed at all. According to the Court: …very minimal degree of affixation…only one part welded to building…the piping is all attached at required intervals by brackets [only]…and [t]he wiring, albeit by clips [only]…many of the components are not bolted to the floor…It is also apparent that it would be costly, and would require extensive work, to remove the plant from the physical facility. Wiring and piping would be cut, walls pierced, and the building structure affected...

Heavy emphasis was placed on the "purpose of affixation" Test and on very unique custom-made nature of building and integration of use evident between the equipment and that building. For instance, the Court specifically finds as follows: More compelling, it seems to me, is the overall sense of the installation. The building was restructured in a custom fashion, in a substantial way, for a singular purpose; that is, to house the bleach processing plant. This restructuring included major alterations to walls, floors, structure, and all incidental details, and was engineered specifically for this purpose. The bleach plant equipment fits into the building like a hand into a glove. The plant equipment has the appearance of a homogeneous unit, integral to the building, as opposed to a conglomeration of individual items. Due to the extensive manner in which the equipment is integrated into the building, the plant and the building have, in this sense, become one.

75 supra, Note 3 76 (1909) 69 O.R. (2d) 536 (H.C.J.) 77 (1998), 8 P.P.S.A.C. 131 at p. 133 (Ont. S.C.) 78 (1969), 4 D.L.R. (3d) 549 at 554-55 (B.C.C.A.) 79 (1996), 28 O.R. (3d) 139 (Gen. Div.) – 45 –

Similar findings of fixtures were found in: Re Roy Wolf Brewing Co.80 (built-in brewing equipment); Cormier v. Federal Business Development Bank81 (autobody repair equipment); and 859587 Ontario Ltd. v. Starmark Property Management Ltd.82 (3,500 pound spray paint booth).

1998 CarswellOnt 2937

18 R.P.R. (3d) 201, 164 D.L.R. (4th) 167, 40 O.R. (3d) 481, 14 P.P.S.A.C. (2d) 20, 42 B.L.R. (2d) 16, 123 O.A.C. 251, [1998] O.J. No. 3022

859587 Ontario Ltd. v. Starmark Property Management Ltd.

Ontario Court of Appeal

Krever, Osborne, Doherty JJ.A.

Heard: June 16, 1998 Judgment: July 27, 1998 Docket: CA C27783

Proceedings: affirming (1997), 34 O.R. (3d) 43 (Ont. Gen. Div.)

Counsel: Emilio Bisceglia, for the appellant. Bernie Romano, for the respondent.

Subject: Insolvency; Corporate and Commercial; Property

Landlord and tenant --- Distress — Effect of conditional sales agreement

Landlord appealed judgment declaring distraint and sale of paint booth unlawful — Paint booth was in possession of tenant but owned by creditor under conditional sales agreement — Trial characterization of paint booth as trade fixture was not unreasonable — Creditor's interest attached before installation of paint booth on landlord's premises — At time of distraint, paint booth formed part of property — Paint booth could not be subject to distraint — Appeal dismissed.

Landlord and tenant --- Distress — Remedies — Miscellaneous issues

Landlord appealed judgment declaring distraint and sale of paint booth unlawful — Paint booth was in possession of tenant but owned by creditor under conditional sales agreement — Trial characterization of paint booth as trade fixture was not unreasonable — Creditor's interest attached before installation of paint booth on landlord's premises

80 (1926), 7 C.B.R. 625 (Ont. S.C.) 81 25 B.L.R. 194, 3 P.P.S.A.C. 161 82 (1998) 18 R.P.R. (3d) 201, 164 D.L.R. (4th) 167, 40 O.R. (3d) 481, 14 P.P.S.A.C. (2d) 20, 42 B.L.R. (2d) 16 – 46 –

— At time of distraint, paint booth formed part of property — Paint booth could not be subject to distraint — Appeal dismissed.

Landlord and tenant --- Distress — Right to distrain — General

Landlord appealed judgment declaring distraint and sale of paint booth unlawful — Paint booth was in possession of tenant but owned by creditor under conditional sales agreement — Trial characterization of paint booth as trade fixture was not unreasonable — Creditor's interest attached before installation of paint booth on landlord's premises — At time of distraint, paint booth formed part of property — Paint booth could not be subject to distraint — Appeal dismissed.

Landlord and tenant --- Fixtures — What constituting fixture

Landlord appealed judgment declaring distraint and sale of paint booth unlawful — Paint booth was in possession of tenant but owned by creditor under conditional sales agreement — Trial characterization of paint booth as trade fixture was not unreasonable — Paint booth was fixed to property but was removable at option of tenant — At time of distraint, paint booth formed part of property — Paint booth could not be subject to distraint — Appeal dismissed.

Personal property security --- Attachment of security interest — Special rules — Fixtures

Landlord appealed judgment declaring distraint and sale of paint booth unlawful — Paint booth was in possession of tenant but owned by creditor under conditional sales agreement — Creditor's unperfected security interest attached before installation of paint booth on landlord's premises — Annexation of paint booth to landlord's realty did not result in loss of creditor's interest — Creditor held priority interest — Appeal dismissed.

Personal property security --- Priority of security interest — Security interests versus other interests — Under provincial law — Lien, charge or other interest given by statute or rule of law — Distress for rent

Landlord appealed judgment declaring distraint and sale of paint booth unlawful — Paint booth was in possession of tenant but owned by creditor under conditional sales agreement — Creditor's unperfected security interest attached before installation of paint booth on landlord's premises — Annexation of paint booth to landlord's realty did not result in loss of creditor's interest — Creditor held priority interest — Appeal dismissed.

Annotation

The long form style for this decision refers to the plaintiff, 859587 Ontario Ltd., as "carrying on business as Atlantic International Equipment Sales", and the thoroughly reasoned decision of Damont J., in the General Division [(1997), 10 R.P.R. (3d) 238, 34 O.R. (3d) 43, 12 P.P.S.A.C. (2d) 281] has already gained some considerable notoriety amongst personal property practitioners under the moniker of the "Atlantic case".

It is refreshing to have a simple set of facts in which to present the law. All too often, confusing facts lead to confusing judgements, and, to the extent that there is such a thing, to bad law. In the Atlantic case, the issue before the Court of Appeal was a relatively simple priority battle over a trade fixture between a secured creditor (whose security interest had attached in the trade fixture prior to installation), on the one hand, and a distraining landlord, on the other.

Although presented in this annotation slightly out of sequence, Mr. Justice Doherty's analysis can be summarized as follows:

1. If the collateral is a chattel, the landlord exercising distraint has priority (Leavere v. Port Colborne (City) (1995), 22 O.R. (3d) 44, 25 M.P.L.R. (2d) 122, 122 D.L.R. (4th) 200, 9 P.P.S.A.C. (2d) 78, 79 O.A.C. 16 (Ont. C.A.)

2. If, however, the collateral is a fixture, whether a trade fixture or a "regular" fixture, such a fixture cannot be distrained against (the theory being that a landlord's distress lien extends only to tangible personal property found on the land).

3. If a secured creditor's security interest in a fixture attached prior to the affixation of the fixture to the real estate, the secured creditor's claim has priority over the interests of existing realty owners (s. 34(1) of the Personal Property Security Act, R.S.O. 1990, c. P.10 [PPSA]).

4. The collateral, a 3,000 lb. spray paint booth, was a trade fixture. The secured creditor's security interest in the spray booth attached prior to its affixation to the building. The secured creditor wins. – 47 –

The reasons at both the trial and appellate levels are well written and, as a result, the analysis has, for want of a better term, a certain eloquence to it. As with the Sirens, however, one must be wary of being lulled into a sense that all is safe and calm. Like many things beautiful, an eloquent decision often masks a number of possibly unsettling issues.

Mr. Justice Doherty himself stumbles across one of these issues in the determination of the spray booth as a trade fixture. Although he is very careful not to upset the trial decision, Doherty J. makes it quite clear that, had he been considering the issue at trial, he may very well have characterized the spray booth as a chattel, and hence distrainable by the landlord. Although he does not elaborate on his reasons for his thinly veiled pro-chattel leanings, there are a long line of cases that consider property that is only lightly affixed to realty, and then only to further enhance its function qua chattel (c.f., enhancing the function of the land or buildings), to in fact be a chattel and not a fixture, irrespective of affixation (see, e.g., Haggart v. Brampton (Town) (1897), 28 S.C.R. 174 and La Salle Recreations Ltd. v. Canadian Camdex Investments Ltd. (1969), 68 W.W.R. 339, 4 D.L.R. (3d) 549 (B.C. C.A.)). By his own words, the finding of the spray booth as a trade fixture by the trial court was a "close call", and he invokes the judicial equivalent of the "tie goes to the runner" rule in allowing the trial decision to stand on this point.

Other aspects of the appellate decision give rise to slightly less obvious issues. For instance, the Court accepts, with little critical analysis, the general proposition set forth by the Court of Appeal in Leavere that, if the spray booth had been a chattel, the distraining landlord would have defeated the secured creditor "hands down" (for an arguably adequate analysis of the Leavere decision, see Lem, "Distressing the Distressor: A Commentary on Leavere v. Port Colborne (City) — Municipal Distress vs. Perfected Security Interests", (1997) 4 Digest of Municipal and Planning Law, Vol. 4, Issue 3, pp.35, 47-49). Although ultimately rendered obiter by the finding that the spray booth was not a chattel, as far as this annotator is aware, the general proposition that a distrainor outside bankruptcy (perhaps within a bankruptcy as well — see 1064521 Ontario Ltd., Re (1998), 18 R.P.R. (3d) 81, 38 O.R. (3d) 407, 1 C.B.R. (4th) 192 (Ont. Bktcy.) and Canadian Imperial Bank of Commerce v. Canotek Development Corp. (1997), 13 R.P.R. (3d) 187, 152 D.L.R. (4th) 261, 35 O.R. (3d) 247, 48 C.B.R. (3d) 161, 103 O.A.C. 302 (Ont. C.A.)) always beats a secured creditor is too broad, and much depends upon the nature of the security interest. In the Atlantic case, the security interest in the spray booth was in the nature of a conditional sale contract, with title being retained by the secured party. Although the distinction between title retention and title charging appears to have lost its relevance in modern PPSA jurisprudence (see, e.g., Ziegel and Denomme, The Ontario Personal Property Security Act: Commentary and Analysis, 1994, Canada Law Book, at §31.5), it is still a distinction with meaning in the law of distress, with a landlord still being prevented from distraining fully against chattels "owned" by a conditional seller (see, e.g., J.R. Auto Brokers Ltd. v. Hillcrest Auto Lease Ltd., [1968] 2 O.R. 532, 70 D.L.R. (2d) 26 (Ont. H.C.); Bennett, Bennett on PPSA (Ontario), 1991, CCH, at pp. 16-17; and Haber, Landlord's Rights and Remedies, 1996, Canada Law Book, at pp. 39-40; see also the excellent anaylsis of Dambrot J. in the trial version of the Atlantic case, 10 R.P.R. (3d) 238 at pp. 244-248). So, even if the "close call" on the spray booth being a chattel had gone the other way, the secured creditor might still have won.

Likewise, and ignoring for the moment the title retention issue, the Court of Appeal may have been somewhat overly anxious to embrace the proposition that a landlord has no right to levy distraint against trade fixtures. Indeed, the Court rejects the two cases cited at the trial level in support of the proposition that a landlord can distrain trade fixtures, Howell v. Listowel Rink & Park Co. (1886), 13 O.R. 476 (Ont. C.A.) and Davy v. Lewis (1859), 18 U.C.Q.B. 21 (C.A.), in part because these two cases were decided prior to, and implicitly overruled by, the now seminal fixture decision of Chief Justice Meredith in Stack v. T. Eaton Co. (1902), 4 O.L.R. 335, 1 O.W.R. 511 (Ont. Div. Ct.). While this annotator concedes that Stack v. T. Eaton Co. does rather redefine the fixture in Canadian jurisprudence (and surmises that there is not a single Canadian fixturing decision post-dating Stack v. T. Eaton Co. that does not refer to Stack v. T. Eaton Co.), the fact is that Stack v. T. Eaton Co. was not a distress against trade fixtures case, and there is nothing in Stack v. T. Eaton that would inherently lead one to conclude that a landlord cannot distrain against trade fixtures. Indeed, neither the trial nor the appellate Court in the Atlantic case seem, based on the decisions themselves, to have considered a number of post-Stack Ontario High Court decisions actually permitting distraint against trade fixtures (e.g., Blanshard v. Bishop (1911), 2 O.W.N. 996, 19 O.W.R. 28 and Simmons v. Mulhall (1913), 24 O.W.R. 736, 4 O.W.N. 1424, 11 D.L.R. 781 (Ont. H.C.)). This annotator falls well short of suggesting that the Court of Appeal was actually wrong in concluding that a landlord cannot distrain against trade fixtures, but merely submits that such a proposition, based both on theory and available authorities, might also have been somewhat of a "close call".

Having concluded that the spray booth was a trade fixture and that a landlord cannot distrain against a trade fixture, the only remaining legal issue was whether the landlord could claim the spray booth as a part of the freehold (after all, the terms of the lease prevented its removal while the tenant was in default, and the spray booth was found to have been affixed to the land sufficient to render it a fixture). In this case, Doherty J. resolves the issue, correctly it is submitted, by applying s. 34 of the PPSA which allows security interests in fixtures attaching prior to affixation to defeat existing real property interests. – 48 –

Although no complaint can be levelled at Doherty J.'s application of the legislation, this annotator suggests that the legislation itself, together with its equally ill-begotten equivalents in other PPSA and UCC jurisdictions, remains a bastard intrusion into real property law and the source of unending intellectual anguish for real property practitioners. Section 34 of the PPSA shares a relatively recent conceptual heritage with s. 78(3) of the Construction Lien Act, R.S.O. 1990, c. C.30 (see Park Contractors Inc. v. Royal Bank (1998), 18 R.P.R. (3d) 157, 38 O.R. (3d) 290, 38 C.L.R. (2d) 255 (Ont. Gen. Div.)). Both of these statutes share the unifying theory that contributions made by non- real estate interests can in fact accrue to the benefit of real estate interests, without the corresponding obligation to pay for same by the holders of such real estate interests and, to prevent such "windfalls", real property priority schemes (which have proven successful for centuries) ought to be perverted to allow for new priorities recognizing these non-real property interests.

The introduction of s. 34 of the PPSA into the law has caused untold grief to real estate practitioners. To this day, practitioners and law students alike get physically ill trying to sort out the circularity problems created by interjecting an essentially foreign notion into the hitherto fully functional real property priority model (see, e.g., G.M.S. Securities Ltd. v. Rich-Wood Kitchens Ltd. (1988), 8 P.P.S.A.C. 131 (Ont. H.C.); and (1991), (sub nom. Rich-Wood Kitchens Ltd. v. National Trust Co.) 77 D.L.R. (4th) 18, 2 O.R. (3d) 58, 44 O.A.C. 1, 1 P.P.S.A.C. (2d) 233 (Ont. Div. Ct.).The singular most distasteful aspect of s. 34 of the PPSA, however, is the utter stealth with which it operates. An Ontario PPSA secured creditor can actually achieve such priority over a registered owner of real property by virtue of attachment alone (s. 34 does not require that the secured party actually perfect its security interest via any registrations under either the PPSA or the relevant land registration statutes in order to enjoy the priority). Practitioners who recall PPSA 101 will remember that attachment is a contractual matter that need not be recorded and cannot be searched for. Scollin J., commenting on the Manitoba equivalent of s. 34 of the PPSA in Manning v. Furnasman Heating Ltd., 4 P.P.S.A.C. 246, [1985] 3 W.W.R. 266, 33 Man. R. (2d) 216 (Man. Q.B.), remarked, in a delightfully Denning-esque manner:

The wooden horse of Troy came into the new home of Mr. and Mrs. Manning [the real estate owners] in the guise of a gas furnace. ...the automatic priority which is hatched in the privacy of attachment, and which is guaranteed indefinitely against the existing owner of the property, is nothing less than statutory ambush. ...Furnasman [the PPSA secured creditor] lay in the weeds with an unperfected security interest...

Restrictions in both space and time, together with all too real limitations in intellectual ability, prevent this annotator from venting fully and poetically against the blasphemy that is s. 34 of the PPSA. Readers are, instead, commended to Bruce MacDougall, "Fixtures and the PPSA: Of the Wooden Horse of Troy, Creditors in the Weeds and Statutory Ambush", (1993) Can. Bar Rev., Vol. 72, No. 4, p. 496, the single best article to date chronicling the history and issues associated with fixture financing legislation, including an editorial position on the legislation which warms the cockles of this annotator's heart. For an almost equally excellent piece (marred only by the author's reticence to come over from the dark side of the PPSA and grasp real property as the one true faith), readers are also commended to Michael E. Burke, "Fixture Financing under the PPSA: The Ongoing Conflict between Real Property and Fixture-secured Interests", (1986) Osgoode Hall Law Journal, Vol. 24, No. 3, p. 547. There are also a number of excellent U.S. articles on the U.C.C. equivalents, but between MacDougall and Burke, the issues relating to the Canadian law of fixture financing are thoroughly exhausted.

While this tongue-in-cheek critique of the section is all well and good, practitioners are faced with the more serious issue of their title opinions. Although s. 34 of the PPSA does have a saving provision nullifying the fixture financier's priority in the case of a purchaser for value of the real estate without notice, that does not provide comfort in the case of a static opinion (i.e., where a client requests an affirmation of title outside of the context of an acquisition). This annotator's standard form title opinion did not, until the Atlantic case, take into account fixture secured interests arising out of the PPSA (notwithstanding that the Atlantic case did not change the law and the legislation has been around for some time now). Perhaps more frightening, however, is the fact that this annotator cannot remember ever having received a title opinion, even in those situations where opposing counsel was being very aggressive and unreasonable, where title was qualified for s. 34 of the PPSA. And the direct dial to LPIC is...

Jeffrey W. Lem

Cases considered by Doherty J.A.:

Bailey v. Miller, [1932] 3 W.W.R. 260 (Sask. C.A.) — applied

Bruce v. Smith, 19 Alta. L.R. 523, [1923] 2 W.W.R. 327, [1923] 3 D.L.R. 887 (Alta. C.A.) — applied

Cashman Holdings Ltd. v. Canada Trustco Mortgage Co. (1990), 1 C.B.R. (3d) 80 (B.C. S.C.) — applied – 49 –

Commercial Credit Corp. v. Harry D. Shields Ltd. (1980), 29 O.R. (2d) 106, 15 R.P.R. 136, 1 P.P.S.A.C. 99, 112 D.L.R. (3d) 153 (Ont. H.C.) — referred to

Commercial Credit Corp. v. Harry D. Shields Ltd. (1981), 32 O.R. (2d) 703, 1 P.P.S.A.C. 301, 14 B.L.R. 121, 122 D.L.R. (3d) 736, 32 O.R. (3d) 703 (Ont. C.A.) — considered

Cormier v. Federal Business Development Bank (1983), 25 B.L.R. 194, 3 P.P.S.A.C. 161 (Ont. Co. Ct.) — applied

Crossley Brothers Ltd. v. Lee, [1908] 1 K.B. 86 (Eng. K.B.) — applied

Darby v. Harris (1841), 113 E.R. 1374 (Eng. K.B.) — considered

Davy v. Lewis (1859), 18 U.C.Q.B. 21 (U.C. Q.B.) — considered

Deloitte & Touche Inc. v. 1035839 Ontario Inc. (1996), 11 P.P.S.A.C. (2d) 88, 28 O.R. (3d) 139 (Ont. Gen. Div. [Commercial List]) — applied

Deloitte & Touche Inc. v. 1035839 Ontario Inc. (June 23, 1998), Doc. CA C24467 (Ont. C.A.) — referred to

Hellawell v. Eastwood (1851), 155 E.R. 554 (Eng. Exch.) — considered

Howell v. Listowel Rink & Park Co. (1886), 13 O.R. 476 (Ont. C.A.) — considered

Merrell v. A. Sung Holdings Ltd. (1995), (sub nom. Leavere v. Port Colborne (City)) 25 M.P.L.R. (2d) 122, (sub nom. Leavere v. Port Colborne (City)) 22 O.R. (3d) 44, (sub nom. Leavere v. Port Colborne (City)) 122 D.L.R. (4th) 200, (sub nom. Leavere v. Port Colborne (City)) 9 P.P.S.A.C. (2d) 78, (sub nom. Leavere v. Port Colborne (City)) 79 O.A.C. 16 (Ont. C.A.) — considered

Provincial Bill Posting Co. v. Low Moor Iron Co., [1909] 2 K.B. 344 (Eng. K.B.) — applied

Stack v. T. Eaton Co. (1902), 4 O.L.R. 335, 1 O.W.R. 511 (Ont. Div. Ct.) — applied

Surrey Metro Savings Credit Union v. Chestnut Hill Homes Inc. (1997), 29 B.L.R. (2d) 43, 30 B.C.L.R. (3d) 92 (B.C. S.C. [In Chambers]) — applied

Statutes considered:

Landlord and Tenant Act, R.S.O. 1990, c. L.7 s. 31(2) — referred to

Personal Property Security Act, R.S.O. 1990, c. P.10 Generally — referred to s. 4(1)(a) — considered s. 11 — considered s. 20(1)(a)(i) — considered s. 34 — considered s. 34(1) — considered s. 34(1)(a) — considered s. 34(3) — considered s. 34(4) — considered s. 34(5) — considered

APPEAL by landlord from judgment reported at (1997) 34 O.R. (3d) 43, 10 R.P.R. (3d) 238, 12 P.P.S.A.C. (2d) 281 (Ont. Gen. Div.) declaring that distraint and sale of trade fixture on leased property was unlawful and that tenant's creditor was entitled to reacquire possession. – 50 –

The judgment of the court was delivered by Doherty J.A.:

1 This is an appeal from the judgment of Dambrot J. declaring that the appellant's (Starmark Property Management Limited) distraint and sale of a spray paint booth located on property leased by Starmark to a tenant was unlawful. Dambrot J. further held that the respondent, Atlantic International Equipment Sales, the vendor of the booth under the terms of a conditional sales contract, was entitled to reacquire possession of it upon compliance with ss. 34(4) and 34(5) of the Personal Property Security Act, R.S.O. 1990, c. P.10 (P.P.S.A.).

2 The essential facts are these:

• In February, 1996, H.K. Auto Centre rented certain premises from Starmark.

• Under the terms of the lease, all improvements, except trade fixtures, became the property of Starmark when the lease expired. The tenant was required to remove trade fixtures at its own expense at the expiration of the lease. The lease gave the tenant very limited rights to remove and replace trade fixtures during the term of the lease. That limited right was not available if the tenant was in default under the lease.

• In March, 1996, Atlantic sold the spray booth to H.K. Auto Centre for $27,659.00. Under the terms of the agreement, ownership of the booth remained with Atlantic until all payments had been made. Atlantic did not register its agreement under the P.P.S.A.

• The booth was installed in the leased premises in March, 1996.

• The booth was 28 feet by 14 feet and weighed some 3,500 pounds. It was attached to the floor by numerous small nails which could be easily removed and was connected by various pipes to the electrical, water and air systems within the leased premises. Exhaust fumes from the booth were expelled through a vent which exited the building through a hole in the roof. The vent was bolted to the roof.

• In September, 1996, H.K. Auto Centre owed rent arrears of about $12,000.00. Starmark levied a distress on the leased premises and took possession of the spray booth. The booth remained on the rented premises in the same condition it was in prior to the distraint.

• At the time of the distraint, H.K. Auto Centre had paid about $11,000.00 toward the purchase of the spray booth and owed Atlantic about $17,000.00.

• Starmark sold the spray booth to a third party who had agreed to lease the space formerly leased by H.K. Auto Centre.

• Atlantic became aware of the purported sale, registered its conditional sales agreement under the P.P.S.A., and commenced these proceedings.

3 Starmark claims that it was entitled to sell the spray booth and apply the proceeds to pay the rent arrears either because the booth was a fixture and became part of the property which it owned, or because the spray booth was a chattel, and although owned by Atlantic, was subject to distraint under s. 31(2) of the Landlord and Tenant Act, R.S.O. 1990, c. L.7. Atlantic takes the position that the spray booth was not subject to distraint as it was a fixture and that under the terms of s. 34 of the P.P.S.A., its interest had priority over Starmark's interest.

4 Dambrot J. made a careful and detailed analysis of the evidence and the issues. His reasons are reported (1997), 34 O.R. (3d) 43 (Ont. Gen. Div.), and as I am in substantial agreement with them, I need not repeat much of what appears in those reasons.

5 Dambrot J. found that the spray booth was a trade or tenant's fixture. That finding involved the application of long-established legal principles to largely uncontested facts. As Dambrot J. neither misapprehended the evidence, nor the applicable law, his finding must stand unless it is unreasonable. Given the manner in which the equipment was attached to the land, the terms of the lease, and the purpose of the attachment (i.e. to improve the functioning of the machinery and not to improve the property), I think the characterization of the spray booth as a fixture and not as a chattel was a close call. I cannot say, however, that Dambrot J.'s characterization was unreasonable. The case must be approached on the basis that the spray booth was a trade fixture.

6 Can a landlord distrain against a trade fixture? If the answer is yes, then when Starmark distrained against the spray booth it acquired a lien over that property: Commercial Credit Corp. v. Harry D. Shields Ltd. (1981), 32 O.R. (2d) 703 (Ont. C.A.), aff'g. (1980), 29 O.R. (2d) 106 (Ont. H.C.). Under the terms of s. 4(1)(a) and s. 20(l)(a)(i) – 51 – of the P.P.S.A., that lien would have priority over the security interest of Atlantic which was unperfected when the distraint occurred and the lien arose: Merrell v. A. Sung Holdings Ltd. (1995), 22 O.R. (3d) 44 (Ont. C.A.) at 49-50.

7 As Dambrot J. observed, a landlord's right to distrain against trade fixtures is a matter of some controversy in the case law. Most of those cases come from the last century and make difficult reading for those unschooled in the intricacies and idiosyncracies of the common law of real property. As I understand the old cases, they describe two situations in which things placed on the leased premises by the tenant for the purpose of carrying out the tenant's business could not be distrained by the landlord. First, if the thing had become fixed to the property so as to become part of it, it could not be distrained. Second, even if the thing had not become affixed to the property so as to become part of it, it could not be distrained if, upon payment of the arrears, it could not be returned to the tenant in the same condition it was in before the distraint. This second qualification on the landlord's power to distrain developed when distraint required the actual removal of the goods from the leased premises to a pound. If that removal would damage the property so as to render restitution in the same condition impossible, then the property could not be distrained: Hellawell v. Eastwood (1851), 155 E.R. 554 (Eng. Exch.) at 561[FN1]; Darby v. Harris (1841), 113 E.R. 1374 (Eng. K.B.).

8 As indicated above, Dambrot J. found that the spray booth was a trade fixture. A trade fixture is a thing which has become part of the property, is used by the tenant in the tenant's business and is removable at the instance of the tenant: Deloitte & Touche Inc. v. 1035839 Ontario Inc. (1996), 28 O.R. (3d) 139 (Ont. Gen. Div. [Commercial List]) at 150, aff'd, without reference to this point, (June 23, 1998), Doc. CA C24467 (Ont. C.A.). The status of trade fixtures while they are attached to and are part of the property was explained by Meredith C.J. in Stack v. T. Eaton Co. (1902), 4 O.L.R. 335 (Ont. Div. Ct.) at 338 :

That, even in the case of tenants' fixtures put in for the purposes of trade, they form part of the freehold, with the right, however, to the tenant, as between him and his landlord, to bring them back to the state of chattels again by severing them from the soil, and that they pass by a conveyance of the land as part of it, subject to this right of the tenant. [Emphasis added.]

9 A trade fixture is as much a part of the freehold as any immoveable fixture as long as the trade fixture has not been severed from the freehold by the tenant at the time of the distraint. As distraint runs against the tenant's property found on the land and not against the land itself, it follows that trade fixtures which are part of the land at the time of the purported distraint cannot be subject to distraint: Crossley Brothers Ltd. v. Lee, [1908] 1 K.B. 86 (Eng. K.B.) at 90; Provincial Bill Posting Co. v. Low Moor Iron Co., [1909] 2 K.B. 344 (Eng. C.A.) at 349; Bailey v. Miller, [1932] 3 W.W.R. 260 (Sask. C.A.) at 263; Bruce v. Smith, [1923] 3 D.L.R. 887 (Alta. C.A.) at 889; Cashman Holdings Ltd. v. Canada Trustco Mortgage Co. (1990), 1 C.B.R. (3d) 80 (B.C. S.C.) at 85.

10 Dambrot J. referred to Howell v. Listowel Rink & Park Co. (1886), 13 O.R. 476 (Ont. C.A.) and Davy v. Lewis (1859), 18 U.C.Q.B. 21 (U.C. Q.B.) as cases which suggest that a landlord can distrain trade fixtures. Both predate Chief Justice Meredith's definitive description of the status of a trade fixture in Stack v. T. Eaton Co., supra. Furthermore, Davy v. Lewis did not involve a distraint by a landlord. It was a dispute between the landlord and a party claiming the equipment under the tenant's rights to the equipment as set out in the lease between the tenant and the landlord. Burns J. held, at p. 30, that the respective rights of the landlord and those claiming under the tenant fell to be determined by the terms of the lease which declared the property to be the "sole and absolute property" of the tenant. He held that in those circumstances the equipment was the property of the tenant throughout the term of the lease and the tenant could remove it from the leased premises and sell it at any time. He said, at p. 30:

... Whether the law would make all this machinery trade fixtures, and liable to rent, or not, the parties, in my opinion, have completely separated the right of property from the freehold, even though the steam engine and parts of the machinery were annexed to it, and they have intentionally preserved its character of chattels under all circumstances. That character was not to commence at the expiration of the lease, or when the lessee should sever it from the freehold, but was to be at once, at the commencement of the term, and so remain. ...

11 Davy v. Lewis stands for the proposition that as between the landlord and tenant, the terms of the lease govern their respective rights to property described in the lease. The lease made it clear that the equipment remained the property of the tenant and could be removed by the tenant at any time.

12 In Howell, supra, at p. 402, Cameron C.J. specifically declined to determine whether the property was distrainable. He did, however, suggest that all tenants' fixtures, even if they had become part of the freehold, were subject to distraint if they could be returned to the tenant in the same condition they were in before the distraint. This view seems to be contrary to the common law as described in Hellawell v. Eastwood, supra. According to that case, the ability to restore the property to the tenant in its prior condition was only relevant if the object in question had not been so attached to the property as to become part of the freehold. In any event, Chief Justice Cameron's comments are dicta and somewhat unclear. Indeed, the authors of Williams and Rhodes, Canadian Law of Landlord – 52 – and Tenant, 6th ed., Vol. I at pp. 8-66 cite Howell as authority for the proposition that trade fixtures are exempt from distraint.

13 It has long been established that immoveable fixtures are not distrainable at common law. Trade fixtures are different from immoveable fixtures in that they can be restored to the status of chattels at the option of the tenant. Despite that difference, trade fixtures have been treated, certainly in this province, as true fixtures as long as they are attached to and part of the land. The strong weight of authority supports the position that as long as trade fixtures are fixtures, they are no more subject to distraint than immoveable fixtures. The complaint that this position makes the landlord's right to distrain depend, in some cases, on matters as inconsequential as a few screws or nails has validity, but is not a new complaint: see Crossley Brothers Ltd. v. Lee, supra. Although the landlord and tenant relationship is now closely regulated by statute, the Legislature has not seen fit to abandon the common law distinction between fixtures and other goods and chattels of the tenant for the purpose of determining the landlord's right of distraint. Nor has the Legislature altered the common law definition of fixture applicable to the law of distraint. As long as the common law prevails, the manner in which the property is attached to the land will be a significant consideration when deciding whether property is subject to distraint.

14 In the absence of any legislative initiative, I do not think it would be wise for the judiciary to strike out on a different course and formulate a new approach to the determination of the landlord's rights to distrain property on a leased premise. The present law as to the nature of trade fixtures has been settled in this province for over 90 years. I am not convinced that a different approach would yield benefits that would offset the inevitable uncertainty that a new approach would engender.

15 Having determined that Dambrot J. correctly held that the tenant had no right of distraint against the spray booth and hence no lien, I move to s. 34 of the P.P.S.A. That section settles priorities between those who have a security interest in a fixture and those who have an interest in the property to which the fixture is attached. Section 34(1) provides:

(1) A security interest in goods that attached,

(a) before the goods became a fixture has priority as to the fixture over the claim of any person who has an interest in the real property; or

(b) after the goods became a fixture, has priority as to the fixture over the claim of any person who subsequently acquired an interest in the real property, but not over any person who had a registered interest in the real property at the time the security interest in the goods attached and who has not consented in writing to the security interest or disclaimed an interest in the fixture.

16 The scheme created by s. 34 constitutes a legislative determination that the annexation of secured goods to realty should not result in the loss of a security interest which had attached but had not been perfected prior to the goods becoming part of the land: Surrey Metro Savings Credit Union v. Chestnut Hill Homes Inc. (1997), 29 B.L.R. (2d) 43 (B.C. S.C. [In Chambers]) at 50-51.

17 It was argued that s. 34 applies only to immoveable fixtures and not to trade fixtures. The case law reviewed above denies the validity of that distinction. Nor does s. 34 qualify the use of the word fixture. Indeed, s. 34(3), which gives the secured interest holder a qualified right to remove the secured goods from the property, strongly supports the conclusion that s. 34 applies to trade fixtures. I would align myself with those authorities which have so held: Deloitte & Touche v. 1035839 Ontario Inc., supra; Cormier v. Federal Business Development Bank (1983), 25 B.L.R. 194 (Ont. Co. Ct.) at 205. Section 34 of the P.P.S.A. applies to this case.

18 Section 34(1)(a) is the applicable subsection. Even though Atlantic did not perfect its security interest until after distraint proceedings, it had, under the terms of s. 11 of the P.P.S.A., an attached security interest at the time the spray booth was installed on Starmark's property. Starmark had no interest in the spray booth before it became a fixture. Under the terms of s. 34(1)(a), Atlantic's attached secured interest had priority over Starmark's claim which arose out of its interest in the real property. Atlantic was entitled to reacquire the property under s. 34.

19 After concluding that Atlantic had priority, Dambrot J. went on to consider the nature of Starmark's interest in the property (pp. 55-56). As Atlantic had priority over that interest, whatever it may have been, I find it unnecessary to decide the exact nature of Starmark's interest in the spray booth.

20 Dambrot J. also considered Starmark's right to distrain against the spray booth on the assumption that it was a chattel and not a trade fixture (pp. 47-53). While I find his analysis of the arcane language in s. 31(2) of the Landlord and Tenant Act persuasive, I prefer to leave that issue to a case in which it actually arises on the facts. – 53 –

21 I would affirm the judgment of Dambrot J. In that judgment, he directed that Starmark could acquire the booth upon payment to Atlantic of the outstanding balance of the purchase price, together with interest, costs and expenses as set out in the judgment. Starmark did not seek to acquire the booth, but instead appealed that judgment. I would give Starmark 15 days from the release of this judgment to acquire the spray booth from Atlantic upon compliance with the terms set out in paragraph 3 of the judgment of Dambrot J.

22 The respondent is entitled to its party and party costs on the appeal.

Appeal dismissed.

FN1. The correctness of the result reached in Hellawell, but not the principles laid down by it, has been questioned in subsequent cases: see Crossley Brothers Ltd. v. Lee, [1908] 1 K.B. 86 (Eng. K.B.).

1999 CarswellOnt 3477

45 O.R. (3d) 737, 126 O.A.C. 59, 28 R.P.R. (3d) 147, 181 D.L.R. (4th) 221

Logozzo v. Toronto Dominion Bank

Ontario Court of Appeal

Goudge, Borins, MacPherson JJ.A.

Heard: August 13, 1999 Judgment: November 3, 1999 Docket: CA C31306

Proceedings: reversing (1998), 22 R.P.R. (3d) 136 (Ont. Gen. Div.)

Counsel: Michael Carter , for Appellant, Grann. Walter Wieckowski , for Applicant/Respondent, Logozzo. B. Paul Jasiuara , for Respondent, Toronto Dominion Bank.

Subject: Corporate and Commercial; Property

Mortgages --- Sale — Judicial sale — Effect of conveyance — General

Mortgages Act, R.S.O. 1990, c. M.40, s. 22(1)(a).

Mortgages --- Action on the covenant — Right to redemption

Mortgages Act, R.S.O. 1990, c. M.40, s. 22(1)(a).

Mortgages --- Sale — Practice and procedure — Stay of proceedings

Mortgages Act, R.S.O. 1990, c. M.40, s. 22(1)(a).

A mortgagor defaulted on his mortgage and the mortgagee bank provided him with notice of a power of sale. The bank found a purchaser under the power of sale and entered into an agreement of purchase and sale. The mortgagor's application to set aside the notice of sale and to stay the sale of property to the purchaser was granted. The purchaser appealed.

Held: The appeal was allowed. – 54 –

Per Borins J.A. (MacPherson J.A. concurring): At the time the mortgagor commenced his application, it was too late for him to redeem the property. Within the meaning of s. 22(1)(a) of the Mortgages Act , the bank had already sold the property to the purchaser. The mortgagor had also not fulfilled the necessary condition precedent to engage s. 22(1)(a) as he had failed to pay or tender the amount due to discharge the mortgage. A provision in the agreement of purchase and sale provided that the mortgagor had a right to redeem the property up to the time of the waiver or expiration of all rights of termination or fulfilment of all conditions to the agreement of purchase and sale by the bank or purchaser. The provision was for the benefit of the bank and gave the bank an opportunity to make the best deal possible in realizing on its security, notwithstanding the effect of s. 22(1)(a) and without incurring any liability to the purchaser. However, as between the mortgagor and the bank, it created no rights, nor did it provide the mortgagor the foundation to prevent the completion of the agreement of purchaser and sale between the purchaser and the bank. Although the provision permitted the mortgagor to redeem if certain circumstances were met, he could not enforce this benefit against the purchaser or the bank because he was not a party to the agreement of purchase and sale. The provision left the bank free to accept the proper redemption within the time frame contained in the provision and return the purchaser's deposit without incurring liability to the purchaser. The provision could not be relied on here as the mortgagor had not affected the proper redemption at the time his application was brought.

Per Goudge J.A. (dissenting): There was a provision in the agreement of purchase and sale designed to preserve for the bank its right to be repaid in full by the redeeming mortgagor up to the point at which the purchaser to whom the bank is selling no longer has a legal escape hatch from the transaction. The purchaser contracts with full knowledge that until that point the bank is entitled to be repaid by permitting the mortgagor to redeem, thereby voiding the contract of purchase and sale. The provision in this case provided the purchaser the right to terminate the contract up to November 13, 1998 if he refused to waive an unsatisfied and valid requisition. As of November 12, 1998, the mortgagor was able to redeem the property because the bank had a contractual right to let him do so and it was willing to exercise that right.

Annotation

A reading of Logozzo is not a mini mortgage remedy 101 course. It really requires that the reader be at least familiar with the basic rule in Mission Construction Ltd. v. Seel Investments Ltd., [1973] 2 O.R. 190, 33 D.L.R. (3d) 286 (Ont. H.C.) . Mission Construction is authority for the proposition that a mortgagor loses its right to redeem its mortgage after a mortgagee has entered into an agreement of purchase and sale for the mortgaged property. Section 22(1)(a) of the Mortgages Act expressly expunges the right of a mortgagor to redeem its mortgage upon a "sale under the mortgage", and, according to Mr. Justice Lieff in Mission Construction , "sale under the mortgage" is said to take place upon the execution and delivery of the agreement of purchase and sale.

Unfortunately, the basic rule in Mission Construction is not sufficiently broad to cover all (or, indeed, most) of the typical sales under power of sale in Ontario conveyancing. Almost invariably, the agreement of purchase and sale entered into between a mortgagee and a prospective purchaser will contain a provision in the contract entitling the mortgagee to terminate the agreement of purchase and sale in the event of a redemption by the mortgagor before a given deadline (typically, but not always, the closing date) (hereinafter referred to as a "redemption-out" clause).

The basic rule in Mission Construction works well in circumstances where there is no redemption-out clause (although not specifically referred to in Logozzo . See the decision of Cavarzan J. in Montreal Trust Co. of Canada v. Raptis (1994), 42 R.P.R. (2d) 283, 21 O.R. (3d) 350 (Ont. Gen. Div.) for a clear affirmation of the basic application of the rule in Mission Construction when the agreement of purchase and sale does not contain a redemption-out clause), but the wide-spread prevalence of redemption-out clauses has given rise to a number of trial level decisions which have challenged the application of the basic rule in Mission Construction . The decision in Logozzo is the Court of Appeal's attempt at clarifying whether the rule in Mission Construction should still apply if the agreement of purchase and sale contains a redemption-out clause.

Curiously enough, the agreement of purchase and sale giving rise to the litigation in Mission Construction in fact had a crude version of a redemption-out clause. So, for instance, in Mission Construction , the agreement of purchase and sale provided:

Acceptance by the Vendor hereof shall be subject to the rights if any of the registered owner of the property to redemption or to put the Vendor's mortgage in good standing.

Perhaps unfortunately, the court in Mission Construction seems to simply bypass the redemption-out clause by concluding that the redemption-out language did not contemplate a redemption by the mortgagor in the ordinary course, since that right was already lost when the agreement of purchase and sale was signed. Instead, Mission Construction held that its version of the redemption-out clause related only to redemption on the part of the mortgagor as a result of fraud or other malfeasance on the part of the mortgagee. It is not clear what the court in Mission Construction meant by marginalizing the redemption-out language before it. The more common interpretation of the decision is that redemption-out clauses generally can never delay the expungement of the – 55 – redemption right beyond the signing of the contract, so the redemption-out clause had to have an alternative meaning. Equally plausible, however, the court in Mission Construction may merely have meant that the redemption- out language before it was not sufficiently detailed to extend the redemption right (leaving open the possibility that a more carefully crafted redemption-out clause might in fact have extended the redemption right beyond the signing of the contract).

For his part, Mr. Justice Wright, in the trial decision in Logozzo (1998), 22 R.P.R. (3d) 136 (Ont. Gen. Div.) , took a very different approach to the redemption-out clause. He held that the very existence of a redemption-out clause in the contract between the mortgagee and the prospective purchaser provided the mortgagor with an equivalent extension of the redemption period beyond the actual entering into the agreement of purchase and sale as contemplated in Mission Construction . That is, if the mortgagee and the purchaser both expressly contemplated in their contract that the mortgagor may be entitled to redeem the mortgage after entering into of the agreement of purchase and sale, then the mortgagor in fact got the benefit of the mutual expectation of the mortgagee and the purchaser.

As his authority, Mr. Justice Wright cites Mr. Justice Abbey's decision in National Trust Co. v. Saad (1997), 10 R.P.R. (3d) 145, 33 O.R. (3d) 419 , 28 O.T.C. 330 (Ont. Gen. Div.) wherein Mr. Justice Abbey elaborates on what he calls the "addendum" to the basic rule in Mission Construction :

Subsequent authorities, however, . . . have, as it were, pronounced an addendum to the general principle [in Mission Construction ], and this is that if the agreement of purchase and sale itself contemplates a right of redemption continuing until a date after the date of the agreement, then the mortgagor is considered to have a right of redemption consistent with the terms of the agreement.

The "subsequent authorities" referred to by Mr. Justice Abbey in support of this "addendum" to the basic rule in Mission Construction include a number of Ontario trial level decisions such as Miranda v. Wong (April 4, 1986), Doc. RE 821/86, Steel J. (Ont. H.C.) ; Weiss v. Standard Trust Co. (August 13, 1993), Doc. 92-CQ-12383, Wilson J. (Ont. Gen. Div.) ; Rieckenberg v. Canada Permanent Trust Co. (December 5, 1983), Kurisko J. (Ont. Dist. Ct.), and Nalisa Investment Ltd. v. National Bank of Canada (1980), 28 Chitty's L.J. 187 (Ont. S.C.) (hereinafter collectively referred to as the "Miranda decisions"). Applying Saad and the Miranda decisions, Mr. Justice Wright concluded that the agreement of purchase and sale between the mortgagee and the purchaser in Logozzo contemplated a right of redemption continuing until a date after the date of the agreement of purchase and sale. Accordingly, Mr. Justice Wright felt that he had no choice but to conclude that the mortgagor in Logozzo had a right of redemption consistent with the terms actually contemplated by the agreement of purchase and sale.

Mr. Justice Borins delivered the decision for the majority of the panel of the Court of Appeal hearing Logozzo , with Mr. Justice MacPherson concurring and Mr. Justice Goudge wading in with a vigorous dissent. Greatly paraphrased, Mr. Justice Borins' rebuttal of the reasoning of Mr. Justice Wright can be summarized as follows: (i) Saad and the Miranda decisions were misinterpreted by Wright J. and do not stand for the proposition that he believed they stood for; (ii) the Saad and the Miranda decisions were wrongly decided in any event; and (iii) the mortgagors under the Saad and the Miranda decisions could not, in any event, avail themselves of the redemption rights contemplated by s. 22 of the Mortgages Act because neither of them had tendered the monies necessary to discharge the mortgage indebtedness as is expressly required under s. 22(1) of the Mortgages Act .

Mr. Justice Borins' first and seemingly principal objection to the trial decision was that Mr. Justice Wright's interpretation of Saad and the Miranda decisions was simply wrong. According to Mr. Justice Borins, Saad and the Miranda decisions stood for the proposition only that, where an agreement of purchase and sale remained subject to a condition precedent (in the case of Saad , a condition on financing, and in the case of the Miranda decisions, a condition that there be no earlier redemption by the mortgagor) then, it cannot be said that an agreement of purchase and sale has in fact been entered into, and therefore the mortgagor's rights to redeem have not yet been expunged. In other words, according to the majority of the Court of Appeal in Logozzo , a "conditional" agreement of purchase and sale is somehow inchoate for the purposes of s. 22 of the Mortgages Act and does not , therefore, attract the basic rule in Mission Construction . Accordingly, s. 22(1) of the Mortgages Act only expunges a mortgagor's right of redemption upon the execution of the agreement of purchase and sale and the waiver or satisfaction of all conditions precedent (or what are clients and their brokers are fond of referring to as "going firm"). Curiously enough, the proposition is perhaps best summarized by none other than Mr. Justice Wright in obiter at trial:

Until the agreement of purchase and sale crystallizes by the satisfaction of all conditions and the waiver of all other terms that agreement is not binding and the right of the mortgagor to redeem continues, but once the agreement crystallizes the redemption is lost.

Mr. Justice Borins concludes that the redemption-out clause in Logozzo was not in fact expressed as a condition precedent. Instead, the redemption-out clause in Logozzo was merely an " . . . understanding that the mortgagor had – 56 – a right to redeem in certain circumstances." As there were no other conditions precedent in the contract, the agreement of purchase and sale in Logozzo was in fact "firm", and the "addendum" contemplated in Saad and the Miranda decisions therefore had no application, so the mortgagor did in fact lose its right to redeem forthwith upon the execution of the agreement of purchase and sale, all in accordance with the basic rule in Mission Construction .

With respect, we have a number of difficulties in following this primary ratio of the Court of Appeal's majority decision. First of all, it is simply unfair to hold that Mr. Justice Wright misunderstood Saad or the Miranda decisions. That is, whether or not Saad and the Miranda decisions should have been interpreted as authorities for the proposition that a mortgagor's right to redeem can be extended by the very existence of a redemption-out clause in the agreement of purchase of sale, Mr. Justice Wright certainly did not misinterpret these rogue decisions. While all of these cases extended the mortgagor's right to redeem beyond the execution and delivery of the agreement of purchase and sale, the rationale of the reasons is mixed at best. In fact, with the possible exception of the Rieckenberg case (which does mirror Mr. Justice Borins' inchoate conditional agreement reasoning quite precisely), the balance of the Miranda decisions are somewhat ambiguous as to why exactly the mortgagor's redemption rights continue beyond the execution of the agreement of purchase and sale. In fact, they are arguably equally consistent with the "third party beneficiary" approach adopted by Mr. Justice Abbey in his "addendum" in Saad .

Furthermore, even if, as the majority of the Court of Appeal in Logozzo would suggest, Saad and the Miranda decisions are to be interpreted as meaning that agreements of purchase and sale attract the basic rule in Mission Construction only after they become "firm" (or if they were never conditional in the first place), we find it very difficult to distinguish the redemption-out clause in Logozzo (which the majority of the Court of Appeal found to be merely "an understanding" falling short of creating a conditional agreement):

The purchaser understands and agrees that the mortgagor has the right to redeem the property up to the time of waiver or expiration of all rights of termination or fulfilment of all conditions, and this agreement is subject to that right. In the event of a redemption by the mortgagor, this agreement shall be null and void and any deposit monies will be refunded in full without interest . . . [emphasis added] from the very similar sounding redemption-out clauses in some of the Miranda decisions (which the majority of the Court of Appeal interprets as creating conditional agreements). So, for instance, the redemption-out clause in Nalisa provides as follows:

It is understood that the Vendor is selling the Read Property under Power of Sale contained in the mortgage and that the required Notice has been given to the registered owner of the Property and all subsequent encumbrancers and that the time for redemption under the Notice has expired without any redemption having been made; however, this Offer is conditional upon there being no redemption made prior to closing by the registered owner or subsequent encumbrancers under an Order of a Court of Competent Jurisdiction. If the registered owner redeems the Property, then this Offer shall become null and void and all deposit monies shall be returned forthwith to the Purchaser without interest or deduction. [emphasis added]

With respect, we submit that there is little, if any, legal difference between these various redemption-out clauses; although the verbiage varies between each clause, all of them appear to be conditions precedent for the benefit of the mortgagee, providing the mortgagee with the right to terminate on the happening of a future event (e.g., purported redemption by the mortgagor). However, by insisting that Saad and Miranda were distinguishable from Logozzo as being conditional agreements, without contemporaneously giving some criteria on just how to distinguish an "understanding" from a "condition" (in our respectful view, because there was no reasonable way of so distinguishing the two — it has to be something more sophisticated than simply the absence of the word, "condition"), the majority of the Court of Appeal leaves the practitioner in a conundrum: unless the redemption-out clause is identical to one or more of the redemption-out clauses adjudicated, which agreements of purchase and sale would follow the Miranda decisions (giving mortgagors an extended right to redeem) and which agreements of purchase and sale would follow Logozzo (crushing the redemption right on the entering into of the sale contract)?

The answer to the conundrum, curiously enough, lies in what seems to be a "secondary" or "alternative" ratio proffered by the majority of the Court of Appeal. In this secondary ratio, Mr. Justice Borins posits that, even if Saad was correctly interpreted by Mr. Justice Wright, the "addendum" put forth by Mr. Justice Abbey in Saad (i.e. that a mortgagor gets the benefit of any redemption-out clause negotiated between the mortgagee and the purchaser) was an incorrect conclusion at law. According to Mr. Justice Borins, a mortgagor, which is essentially a legal stranger to the relationship as between the mortgagee and its prospective purchaser, simply cannot acquire rights under the agreement of purchase and sale because it is not a party thereunder and shares no privity with the parties thereto. The concept is expressed very well by Mr. Justice Borins in his reasons:

. . . [The redemption-out clause] cannot serve to confer on Logozzo a right to redeem beyond the time permitted by s. 22(1)(a) . . . as between Logozzo and TD, it created no rights, nor did it provide Logozzo the foundation to prevent the completion of the Grann-TD transaction . . . In my view, although [the redemption- out clause] permits Logozzo – 57 – to redeem if certain circumstances are met, he conuld not enforce this benefit against Grann or TD for the reason that he was not a part to the agreement of purchase and sale. As a general rule, the docutine of privity of contract provides that a contract can neither confer rights, nor impose obligations on third parties.

So, for example, if A were contracted to sell a widget to B, subject to the right on the part of A to terminate that contract in the event that it receives and elects to accept a different offer from C, it does not follow that that C has the right to force A to contract with it. While such an arrangement does make B's contractual position rather precarious (depending as it does on A's willingness to deal with C), the arrangement falls short of creating an option in favour of C enforceable against A to call for the widget to the detriment of B.

Alternatively put, consider the example of an employee that takes a maternity leave of x months ("x " being the statutory limit). The employer hires a replacement employee on a contract basis providing, inter alia , that if, at any time (even after x months), the employee on maternity leave returns to the job, the employer may then terminate the new contract position replacement employee on short notice. While the contract between the employer and the contract replacement employee gives the employer the option to take the maternity leave employee back, even after x months (and limits the employer's liability to the contract replacement employee for early termination if the employer chose to take the maternity leave employee back), it cannot be said that the contract between the employer and the contract replacement employee gaves the maternity leave employee a right to compel the employer to accept the employee back after the x months. Imagine further that the contract replacement employee proves to be the far better hire and the maternity leave employee fails to invoke her statutory right to return to her job within the x months. Several months after the x months is long past, the employee on maternity leave saunters back to the job and insists on being reinstated (at the expense of the contract replacement employee — this hypothetical requires that the job be unique). While it is obvious that the employer may take back the maternity leave employee, it is equally obvious to us that the employer need not take back the now late maternity leave employee. The fact that the employment contract between the employer and the replacement contract employee contemplated that the maternity leave employee may return, even belatedly, simply cannot be used by the as a sword by the maternity leave employee to "bootstrap" additional reinstatement rights beyond the x months contemplated by the law.

Likewise, the mortgagee may contract for a right to unilaterally terminate the agreement of purchase and sale with the purchaser in the event that the mortgagor purports to redeem the mortgage, but that agreement cannot be said to create an option on the part of the mortgagor, enforceable against the mortgagee to redeem the mortgage beyond the time that it otherwise had at law to do so, to the detriment of the purchaser.

Although not expressly raised in Mr. Justice Goudge's dissent, Mr. Justice Borins (correctly we submit) identifies the "addendum" proposed by Mr. Justice Abbey in Saad as being an application of the school of thought that would extend contractual rights to third party beneficiaries that otherwise would have no privity of contract. The concept seems to be enjoying a modern resurgence in popularity after London Drugs Ltd. v. Kuehne & Nagel International Ltd., [1992] 3 S.C.R. 299, 97 D.L.R. (4th) 261, [1993] 1 W.W.R. 1, 143 N.R. 1, 73 B.C.L.R. (2d) 1, 43 C.C.E.L. 1, 13 C.C.L.T. (2d) 1, 18 B.C.A.C. 1, 31 W.A.C. 1 (S.C.C.) . Mr. Justice Borins did not have to consider the application of Kuehne & Nagel to the facts at hand, and implies that, if he had, he may very well have interpreted Kuehne & Nagel narrowly enough so as not to interfere with his holding against the mortgagor in Logozzo . He does not elaborate on how his analysis would have gone, but there is a significant school of thought that suggests that the world as we know it may not be ready for a widespread dismantling of the doctrine of privity of contract, and we are familiar with the arguments of those who would advocate keeping Kuehne & Nagel as limited as possible to its original facts.

This secondary ratio differs considerably from the majority's principal ratio. In the principal ratio, the Court of Appeal sought to reconcile Logozzo with Saad and the Miranda decisions. In this secondary ratio, the Court of Appeal does not attempt to reconcile Logozzo with these rogue trial level decisions and may, instead, effectively overrule them.

While making available this secondary ratio certainly resolves the original conundrum posed by the principal ratio (how to distinguish between the "conditional" redemption-out clause a la the Miranda decisions, and the mere "understanding" redemption-out clause a la Logozzo ), the concurrent existence of both ratio decidendii creates a further conundrum: what principle actually dictated why the mortgagor in Logozzo was not permitted to redeem after the agreement of purchase and sale, notwithstanding the existence of a redemption-out clause in the agreement of purchase and sale? Was it because the relevant redemption-out clause did not create a conditional contract (the primary ratio), or was it because no redemption-out clause in any agreement of purchase and sale can ever confer an extended right to redeem to the mortgagor (the secondary ratio)? If it was the former, then it may still be that agreements of purchase and sale that contain genuine conditions precedent will still allow mortgagors to redeem, even long- after the agreement of purchase and sale has been entered into. We suspect that the majority of precedent redemption-out clauses look more like conditions precedent than they do like "understandings" (although we, for instance, have considered modifying our standard power of sale documents to take out the more patent conditional language in favour of "understanding" verbiage and an express rejection of the mortgagor acquiring any rights — let's hope that is enough to avoid further litigation). If it was the latter, then practitioners need not try to distinguish and categorize the various redemption-out clauses, since no such clause, whether it made the contract – 58 – conditional or not, could ever extend the redemption right beyond the entering into of the agreement of purchase and sale.

The majority's reasons in Logozzo is not that clear on the relevant test, although, in our respectful submission, the secondary ratio should govern entirely as to redemption-out clauses. Accordingly, for all of the reasons relating to privity of contract provided by Mr. Justice Borins in Logozzo , the "addendum" proposed by Abbey J. in Saad should be expressly overturned, so that no redemption-out clause contained in an agreement of purchase and sale between a mortgagee and a mortgagor (whether an "understanding" or a "condition precedent" or something else) can ever be inferred as granting extended or supplementary redemption rights to a mortgagor enforceable by that mortgagor against the mortgagee and the purchaser.

That still leaves in question to status of otherwise conditional agreements of purchase and sale (e.g., Saad , which had a redemption-out clause but was conditional upon financing). According to the majority in Logozzo , any conditional contract (whether or not the condition related to a redemption-out) would extend the redemption rights of the mortgagor at least until the contract was no longer conditional. In other words, the true "addendum" to the rule in Mission Construction ought to have been, "a 'sale under the mortgage' is said to take place when a 'firm and binding ' agreement of purchase and sale comes into existence". We have previously alluded to the possibility that the rule in Mission Construction would need such an addendum (see Lem, case annotation on Raptis, supra ). In true practice conditions, solicitors can expect to see the application of Mission Construction modified by this revised "addendum" far more often than not.

Craig Carter of Fasken, Campbell & Godfrey had a fascinating suggestion that the law ought not recognize these conditional contracts as keeping alive redemption rights that otherwise would have expired on the execution of the contract. Instead, he suggested that perhaps mortgagors' redemption rights should be somehow suspended (as opposed to expunged forever) on the signing of a conditional agreement of purchase and sale. If the contract "goes firm", the mortgagors' redemption rights never revive and are, ex post facto , expunged as of the execution of the agreement of purchase and sale. If, on the other hand, the contract is terminated by operation of the condition (or otherwise), the mortgagors' redemption right is revived, unaffected by the execution and delivery of the now terminated agreement of purchase and sale. While, like most of Mr. Carter's ideas, the proposal has some merit (it certainly provides certainty to purchasers and mortgagees under power of sale), there is also a risk that extremely conditional agreements of purchase and sale (those with such vacuous and subjectve conditions so as to render the agreements of purchase and sale little more than glorified option agreements), especially with long closings, can unduly prejudice mortgagors that are otherwise ready, willing and able to redeem.

Almost as an additional nail in the coffin, Mr. Justice Borins also notes that the mortgagors in Saad and in Logozzo were not entitled, irrespective of when, if at all, their respective rights of redemption would otherwise have been expunged, to redeem their mortgages in any event, since the mortgagors in these cases were not in funds to tender the mortgage indebtedness to the mortgagee. This point is made throughout the majority's reasons in Logozzo , and provides an excellent segue into the vigorous and, at times clever, dissent in Logozzo by Mr. Justice Goudge.

Mr. Justice Goudge did not adopt the majority position of requiring the tendering of the mortgage monies as a precondition for adjudicating the entitlement to redeem. According to Mr. Justice Goudge:

The Act does not require a tender as a precondition to possession the right to redeem. Nor, as I read it, does the case law, unless the mortgagor is also seeking to enjoin the sale under power of sale or unless the mortgagor is seeking a declaration after a sale under the mortgage has occurred . . .

There cannot be any dispute that a mortgagor cannot actually redeem without tendering, but Mr. Justice Goudge has a point when he concludes that simply asking for declaratory relief in anticipation of a redemption does not require a pre-tendering of funds.

On the more fundamental issue of whether or not a mortgagor should be entitled to an extended redemption period if there exists a redemption-out clause, Mr. Justice Goudge in effect adopts Mr. Justice Abbey's "addendum" rule set forth in Saad , and concludes that a mortgagor should get the benefit of the redemption-out provisions in any agreement of purchase and sale. In his own words Mr. Justice Goudge concludes," . . . Logozzo was able to redeem the property because the Bank has a contractual right to let him to do and it is willing to exercise that right." This is not exactly what happened in Logozzo . While the mortgagee in Logozzo did enjoy a contractual privilege vis-a-vis the purchaser to accept the redemption, in fact the mortgagee in Logozzo did not appear ready to "exercise that right". Instead of simply accepting the redemption and terminating the agreement of purchase and sale (as both the majority and the dissent seem to agree the mortgagee could have done), the mortgagee goes before the court siding with the mortgagor in its claim that the mortgagor could force the issue on both the mortgagee and the purchaser (in effect pleading with the court to confirm that the mortgagee had no choice but to accept the redemption). With the benefit of hindsight, if the mortgagee in Logozzo had simply accepted the redemption and terminated the agreement of purchase and sale, we suspect that the redemption-out language in the agreement of purchase and sale (indeed – 59 – virtually every redemption-out clause that we have seen to date) would have adequately protected the mortgagee against a claim by the disappointed purchaser.

Apparently in the alternative, Mr. Justice Goudge found that if Saad and the Miranda decisions are to be interpreted as per the majority's principal ratio (i.e., that the law allows mortgagors a continuing right until conditional agreements of purchases and sales are "crystallized" and "firm"), then the mortgagor in Logozzo still had his right of redemption up until at least the requisition date because the agreement of purchase and sale between the mortgagee and the prospective purchaser in Logozzo was, by its terms, conditional until the purchaser had had an opportunity to submit its requisitions on title. If we accept Mr. Justice Goudge's proposition that an agreement of purchase and sale is always "conditional" on the mortgagee/vendor delivering good title, then it follows that all agreements of purchase and sale entered into by any vendor and any purchaser will always be "conditional", since every purchase contract, whether explicitly or implicitly, is conditional upon the delivery of good title and the payment of the purchase price. This simply cannot be the law. Mr. Justice Borins, again in seeming anticipation of this argument in dissent, cites the English Court of Appeal in Property & Bloodstock Ltd. v. Emerton (1967), [1968] Ch. 94, [1967] 3 All E.R. 321 (Eng. C.A.) as authority for the proposition that:

. . . conditions respecting title in the usual agreement of purchase and sale are just that — a mere matter of title and, therefore, one of the usual terms found in an agreement of purchase and sale — with the result that the agreement is an unconditional contract of sale.

Seemingly overlooked altogether by both the majority and the dissent in the Court of Appeal's decision in Logozzo is the approach to stare decisis adopted by Mr. Justice Wright at trial. In fairness to Mr. Justice Wright, he made clear in his decision that he favoured the majority approach by the Court of Appeal:

There is a difference between an agreement where the parties affirmatively stipulate that the mortgagor shall have the right of redemption up to the date of closing and an agreement which simply recognizes that a mortgagor has certain rights at law but does not extend those rights. If I were dealing with this clause at first instance I would have concluded that this schedule simply recognizes that until the agreement of purchase and sale crystallizes by the satisfaction of all conditions and the waiver of all other terms that agreement is not binding and the right of the mortgagor to redeem continues, but once the agreement crystallizes the right of redemption is lost. I am not dealing with this clause at first instance however. Abbey, J. has construed this clause and his construction represents the law of this province until reversed by a higher court . . . but was required, instead, by the doctrine of stare decisis to follow Saad . Mr. Justice Borins remarked on the point, when he concludes that, "In my view, Wright J. erred when he felt bound to apply Saad . . . ", but did not elaborate. We have not researched the doctrine of stare decisis in the context of antecedent decisions of the same court, and we are hopelessly in disagreement amongst ourselves as to whether Mr. Justice Wright was correct. That is, with the possible exception of courts of ultimate appeal which need the right to overrule their own previous decisions, in theory, should common law courts, when the facts are not otherwise distinguishable, be entitled to overturn their own prior decisions? On the one hand, see Stuart v. Bank of Montreal (1909), 41 S.C.R. 516 (S.C.C.) and Hogg, Constitutional Law of Canada, Carswell, at s.8.7 for the proposition that, while the Supreme Court of Canada was still inferior to the Privy Council, it felt bound by its own prior decisions on point. On the other hand, see also R. v. Phoenix Assurance Co., [1976] 2 F.C. 649 at 655, [1976] I.L.R. 1-787 , wherein Decary J. concludes that " . . . there can be no stare decisis between judges of the same court". As and by way of an experiment, however, readers are asked to canvass their colleagues as to the correctness of Mr. Justice Wright's position on stare decisis . We suspect the discussion will be as colourful as it is divergent.

It should be noted that the Court of Appeal did not hold that the mortgagor could not redeem under the circumstances, but merely that the mortgagor could not compel the mortgagee to accept the redemption under the circumstances. Even in Logozzo , it was open for the mortgagee to accept the redemption funds from the mortgagor and invoke the redemption-out clause vis-à-vis the purchaser. If there is an adequately drafted redemption-out clause, the mortgagee can always accept the redemption and terminate the agreement of purchase and sale. A mortgagee with a workable redemption-out clause (and they are not that difficult to draft) and a tender of the full redemption price should never opt to close the agreement of purchase and sale. This is because any proceeds over and above the mortgage indebtedness realized on a sale has to be surrendered in any event, so the mortgagee can never do better financially than a full redemption. Since the mortgagee cannot profit from the sale (no matter what the purchase price), and sales under power of sale always run the risk of improvident realization claims (no matter what the purchase price), there is only greater risk and no greater reward for any mortgagee to prefer a third party purchaser to a redeemer.

As a final note on Logozzo , consider the following theoretical quandry. The basic rule in Mission Construction provides that a "sale under the mortgage" takes place at the moment an agreement of purchase and sale is entered into, presumably because the beneficial ownership of the mortgaged property is in fact "sold" as at the moment the mortgagee cum vendor agrees to sell it. This transfer is said to have occurred because, as traditional theory would – 60 – have it, equity would step in to specifically enforce the conveyance (equity doing what ought to have been done). Thus, if equity deems the beneficial title to have moved upon the entering into of the agreement of purchase and sale (as opposed to on closing when the legal title is also conveyed), the doctrine of nemo dat qui non habet leaves the mortgagee cum vendor with no title left for the mortgagor to redeem after the contract is signed, even if the mortgagor thereafter able to tender the full mortgage indebtedness. Consider whether the same paradigm applies in the post-Semelhago world. According to Mr. Justice Sopinka's now infamous obiter on point, specific performance is no longer a priori , even for real estate, and it remains a question of fact to be proven. In other words, equity might not, depending on the genuine uniqueness of the property in question, step in to specifically enforce the conveyance, leaving legal damages as the only recourse for a jilted purchaser. If a property can be said to be totally fungible within the meaning of Mr. Justice Sopinka's admonition, and specific performance would not be available to a purchaser thereof, it might follow that the mortgagee cum vendor never really transfers the beneficial title at all when it enters into even a fully binding unconditional agreement of purchase and sale. Not having really transferred the beneficial title, nemo dat qui non habet could not apply, so the mortgagee cum vendor might still have a title that the mortgagor could redeem (leaving the purchaser with a "slam dunk" damage claim against the mortgagee cum vendor if there is no exculpating redemption-out clause). Needless to say, Logozzo did not deal with this flight of esoterica, and we are not aware of any judicial treatment of this hypothesis. Furthermore, credit is owed to the LL.M in Real Estate class of Osgoode Hall for dreaming up this brain teaser for which we have no pat solution.

Jeffrey W. Lem

Andrea White

Heenan Blaikie

Cases considered by Borins J.A. (MacPherson J.A. concurring):

Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., [1999] 9 W.W.R. 380, 11 C.C.L.I. (3d) 1, 176 D.L.R. (4th) 257, 245 N.R. 88, [1999] I.L.R. I-3717, 67 B.C.L.R. (3d) 213, 47 C.C.L.T. (2d) 1, 127 B.C.A.C. 287, 207 W.A.C. 287 (S.C.C.) — referred to

London Drugs Ltd. v. Kuehne & Nagel International Ltd. (1992), [1993] 1 W.W.R. 1, [1992] 3 S.C.R. 299, (sub nom. London Drugs Ltd. v. Brassart) 143 N.R. 1, 73 B.C.L.R. (2d) 1, 43 C.C.E.L. 1, 13 C.C.L.T. (2d) 1, (sub nom. London Drugs Ltd. v. Brassart) 18 B.C.A.C. 1, (sub nom. London Drugs Ltd. v. Brassart) 31 W.A.C. 1, 97 D.L.R. (4th) 261 (S.C.C.) — considered

Miranda v. Wong (April 4, 1986), Doc. RE 821/86 (Ont. H.C.) — distinguished

Mission Construction Ltd. v. Seel Investments Ltd., [1973] 2 O.R. 190, 33 D.L.R. (3d) 286 (Ont. H.C.) — considered

Nalisa Investment Ltd. v. National Bank of Canada (1980), 28 Chitty's L.J. 187 (Ont. S.C.) — distinguished

National Trust Co. v. Saad (1997), 10 R.P.R. (3d) 145, 33 O.R. (3d) 419, 28 O.T.C. 330 (Ont. Gen. Div.) — distinguished

Property & Bloodstock Ltd. v. Emerton (1967), [1968] Ch. 94, [1967] 3 All E.R. 321 (Eng. C.A.) — considered

Rieckenberg v. Canada Permanent Trust Co. (December 5, 1983), Kurisko J. (Ont. Dist. Ct.) — distinguished

Scarborough (Township) v. Greater Toronto Investment Corp., [1956] O.R. 823, [1956] O.W.N. 597, 4 D.L.R. (2d) 396 (Ont. C.A.) — considered

Standard Realty Co. v. Nicholson (1911), 24 O.L.R. 46 (Ont. H.C.) — considered

Theodore Daniels Ltd. v. Income Trust Co. (1982), 37 O.R. (2d) 316, 135 D.L.R. (3d) 76, 25 R.P.R. 97 (Ont. C.A.) — considered

Van Minnen Construction Ltd. v. Murphy (1977), 19 O.R. (2d) 125, 2 R.P.R. 186, 84 D.L.R. (3d) 214 (Ont. H.C.) — considered

Waring v. London & Manchester Assurance Co. (1934), [1935] Ch. 310, [1934] All E.R. Rep. 642 (Eng. Ch. Div.) — considered – 61 –

Weiss v. Standard Trust Co. (August 13, 1993), Doc. 92-CQ-12383 (Ont. Gen. Div.) — distinguished

Cases considered by Goudge J.A. (dissenting):

Miranda v. Wong (April 4, 1986), Doc. RE 821/86 (Ont. H.C.) — referred to

National Trust Co. v. Saad (1997), 10 R.P.R. (3d) 145, 33 O.R. (3d) 419, 28 O.T.C. 330 (Ont. Gen. Div.) — referred to

Property & Bloodstock Ltd. v. Emerton (1967), [1968] Ch. 94, [1967] 3 All E.R. 321 (Eng. C.A.) — distinguished

Statutes considered by Borins J.A. (MacPherson J.A. concurring):

Law of Property Act, 1925 (15 & 16 Geo. 5), c. 20 s. 101 — referred to

Mortgages Act, R.S.O. 1950, c. 239 s. 19a [en. 1953, c. 66, s. 1(1)] — considered s. 19a(1) [en. 1953, c. 66, s. 1(1)] — considered

Mortgages Act, R.S.O. 1970, c. 279 Generally — referred to s. 21 — considered s. 21(1) — considered s. 21(1)(a) — considered

Mortgages Act, R.S.O. 1990, c. M.40 Generally — referred to s. 22 — considered s. 22(1) — considered s. 22(1)(a) — considered s. 22(1)(b) — considered s. 23 — referred to

Statutes considered by Goudge J.A. (dissenting):

Mortgages Act, R.S.O. 1990, c. M.40 Generally — referred to s. 22(1)(a) — referred to

APPEAL by purchaser from judgment reported at (1998), 22 R.P.R. (3d) 136 (Ont. Gen. Div.) declaring that mortgagor had right to redeem property prior to closing of purchaser's purchase from bank.

Borins J.A. (MacPherson J.A. concurring):

1 This is an appeal by Leif Grann, the purchaser of a 500 acre property from The Toronto-Dominion Bank ("TD") pursuant to power of sale contained in a mortgage from Rodney Logozzo to TD, from the judgment of John deP. Wright J. declaring that Logozzo has the right to redeem the property prior to the closing of Grann's purchase from TD.

2 Subsequent to Grann and TD entering into an agreement of purchase and sale of the property, Logozzo issued an application to set aside the notice of sale issued by TD under the mortgage, to stay the sale of the property to Grann and for other relief. TD then issued a counter-application to add Grann as a respondent to the – 62 – proceedings and for directions respecting the status of the sale. TD took the position, in its supporting affidavit, that it had no objection to Logozzo redeeming the mortgage, provided that if the court permits him to do so, that it would "not put the Bank at risk to any claim for damages by Mr. Grann". Consequently, TD asked the court to declare its agreement of purchase and sale with Grann to be null and void if it permitted Logozzo to redeem the mortgage. After he was added as a respondent, Grann issued a counter-application in which he sought a declaration that Logozzo was precluded from redeeming the property by virtue of s.22(1)(a) of the Mortgages Act , R.S.O. 1990, c.M.40, and a judgment for specific performance of the agreement of purchase and sale. On the issues raised by the parties, Wright J. ruled on only the right of Logozzo to redeem the property. However, it is implicit from his reasons that he refused to stay the sale to Grann since he permitted Logozzo to redeem the property prior to the closing of the Grann's purchase of the property.

3 One of the questions raised by this appeal is whether the time within which a mortgagor is permitted to redeem the mortgaged property under s. 22(1)(a) of the Mortgages Act may be extended by a provision in an agreement of purchase and sale between the mortgagee, as the vendor under power of sale, and the purchaser. If the answer to this question is in the affirmative, it must then be decided whether the mortgagor, not being a party to the agreement of purchase and sale, can derive any benefit from the provision.

4 To understand the discussion which follows, it is helpful to reproduce s. 22(1)(a) of the Act and the provision in the Grann-TD agreement of purchase and sale which is the focus of this appeal.

5 Section 22(1) of the Mortgages Act reads as follows:

22.-(1) Despite any agreement to the contrary, where default has occurred in making any payment of principal or interest due under a mortgage or in the observance of any covenant in a mortgage and under the terms of the mortgage, by reason of such default, the whole principal and interest secured thereby has become due and payable,

(a) at any time before sale under the mortgage; or

(b) before the commencement of an action for the enforcement of the rights of the mortgagee or of any person claiming through or under the mortgagee, the mortgagor may perform such covenant or pay the amount due under the mortgage, exclusive of the money not payable by reason merely of lapse of time, and pay any expenses necessarily incurred by the mortgagee, and thereupon the mortgagor is relieved from the consequences of such default.

6 The agreement of purchase and sale between Grann and TD contains a schedule which forms part of the agreement. It is part of the Ontario Real Estate Association's standard form agreement of purchase and sale when a vendor is selling under power of sale. The italicized portion of paragraph 2 is relevant to the issues in this appeal. The schedule, which is signed by Grann and TD, reads, in part, as follows:

Ontario Real Estate Association VENDOR SELLING UNDER POWER OF SALE (TO BE USED IN CONJUNCTION WITH FORM 101 — AGREEMENT OF PURCHASE AND SALE)

Attached to and forming part of Agreement of Purchase and Sale between "LEIF GRANN " and "TD BANK MORTGAGE CORPORATION " dated the "22ND " day of "OCTOBER ", 19"98 ".

1. It is understood that the Vendor is selling as mortgagee under a Power of Sale contained in a "FIRST MORTGAGE & FINANCING" mortgage made to the Vendor, dated the "29 " day of "Nov. ". 19 "96 " and registered as number "8520 ".

2. It is further understood that on the date of acceptance of this offer there is default under the terms of the mortgage which entitles the Vendor to exercise the Power of Sale. The only evidence of the default, which the Purchaser may require, shall be a statutory declaration by the Vendor setting forth the facts entitling the Vendor to sell under the Power of Sale, including the particulars of the notice of exercising the Power of Sale, the names of the persons upon whom service of the notice has been effected, and declaring that default under the mortgage entitling the Vendor to exercise the Power of Sale has continued up to and including the date of acceptance of this offer and to the time of closing. The Purchaser understands and agrees that the mortgagor has the right to redeem the property up to the time of waiver or expiration of all rights of termination or fulfillment of all conditions, and this Agreement is subject to – 63 – that right. In the event of redemption, by the mortgagor, this agreement shall be null and void and only deposit monies paid will be refunded without interest . [Emphasis added.]

Facts

7 The land in issue is a 500 acre unoccupied water access wilderness tract on Lake Superior in the District of Thunder Bay. It consists of a small island and lakeshore property on which there are no buildings. Logozzo purchased the land in 1994 for $75,000. On November 29, 1996, he mortgaged the land to TD to secure an indebtedness of $50,000.

8 Default occurred in the payment of the debts secured by the mortgage in September 1997, following which TD made a number of demands for payment which Logozzo ignored. Consequently, on April 17, 1998, TD served Logozzo with a notice of sale under the power of sale in the mortgage requesting payment of the principal amount of the mortgage, together with the interest unpaid and owing. The notice warned Logozzo that "unless the said sums are paid on or before the 25th day of May, 1998, I shall sell the property covered by the said mortgage under the provisions contained in it". The mortgagor made no efforts to redeem the property by May 25, 1998.

9 In October, 1998, TD listed the land for sale with a realtor at $79,900, which was the asking price recommended by the realtor with whom it was listed. Grann submitted an offer to purchase the land for $80,000 on October 22, 1998. The offer was accepted by TD on October 23, 1998. It contained a closing date of December 21, 1998 and allowed Grann until December 1, 1998 to examine the title. On October 27, 1998, the agreement was amended to change these dates to November 16, 1998 and November 13, 1998, respectively.

10 On November 5, 1998, Logozzo received an offer from Lloyd Purnell to purchase the land for $211,000, with a closing date of November 20, 1998, four days after the closing date in the Grann-TD agreement of purchase and sale. Logozzo accepted the offer and brought it to TD's attention. This offer was conditional on Purnell obtaining the necessary funds to purchase the land by November 8, 1998. There was no evidence before Wright J. that the condition was fulfilled, extended or waived. Indeed, there was no evidence that Logozzo would be able to redeem the property prior to the scheduled closing date of the Grann-TD agreement, either as a result of the proposed Purnell purchase, or by any other means. Purnell was not a party to the proceedings. Nor did Logozzo supply any evidence that Purnell was financially able to complete the transaction. The absence of such evidence, in my view, is not without significance.

11 On November 6, 1998, Logozzo issued his application to prevent TD's sale to Grann on November 16, 1998. His intention in bringing the application was to permit him to sell the land to Purnell, which would enable him to apparently "redeem the mortgage". The application was made returnable on November 12, 1998, as was TD's counter-application. At Grann's request, the applications were adjourned, on consent, on terms that the rights of the parties were preserved, as in the interim the closing dates of the two offers would occur. Following the conclusion of the proceedings on November 23, 1998, Wright J. reserved judgment until December 13, 1998 and endorsed the record: "All rights and remedies suspended in the meantime." It is common ground among the parties that their rights remain in suspension pending the determination of this appeal.

12 It should be noted that on the date fixed for closing by the agreement of purchase and sale — November 16, 1998 — Grann tendered on TD the amount due on closing, which it rejected on the ground that Logozzo wished to redeem the property. It was explained by counsel that Grann, who considers the property to be unique, did so out of an abundance of caution, not wishing to lose the opportunity to acquire it.

Reasons of Wright J.

13 Wright J. considered, and rejected, the following grounds advanced by Logozzo in support of his position that he had the right to redeem the property: defects in the notice of sale; the sale of the property to Grann for an improvident price; and defects in the Grann-TD agreement of purchase and sale. In the course of considering these grounds, Wright J. observed, correctly in my view, that a "sale" occurs within the meaning of s.22(1)(a) of the Mortgages Act when the vendor and the purchaser have entered into an agreement of purchase and sale with the result, generally speaking, that the mortgagor's right to redeem is put to an end.

14 Wright J. then considered the issue that has given rise to this appeal. He quoted the italicized portion of paragraph 2 of the schedule to the agreement of purchase and sale which I have quoted in paragraph [6]. For the sake of convenience, I will repeat that part of paragraph 2:

The purchaser understands and agrees that the mortgagor has the right to redeem the property up to the time of waiver or expiration of all rights of termination or fulfillment of all conditions, and this agreement is subject to that right. In the event of redemption by the mortgagor, this agreement shall be null and void and any deposit monies paid will be refunded without interest. – 64 –

15 Both Logozzo and TD take the position that the effect of this language is to extend the mortgagor's right to redeem the property from the statutory time permitted by s. 22(1)(a) of the Mortgages Act to the date fixed by the agreement of purchase and sale for the closing of the sale by TD to Grann.

16 As I understand Logozzo's position before Wright J. and this court, it is that the language of paragraph 2 creates, as a condition precedent to the closing of the Grann purchase, the expiry of the right of the mortgagor to redeem the property at any time prior to the closing date of the Grann-TD transaction. In other words, the closing of the transaction is conditional on Logozzo not redeeming the property prior to the time to which Grann and TD agreed for closing.

17 In addition to adopting Logozzo's position, TD advanced another reason why, at the date Logozzo commenced his application, the language of paragraph 2 of the schedule permitted him to redeem the property. Paragraphs 8 and 10 of the agreement of purchase and sale concern the right of the purchaser to examine the title to the property and to raise any objection to title. In reliance on these paragraphs, TD submitted that Grann's right to terminate the agreement arising from any objection to title he might have had not been waived, nor had it expired. Grann had until November 13, 1998 to examine the title — which was seven days after Logozzo issued his notice of application.

18 After reciting the relevant part of paragraph 2 of the schedule, Wright J. concluded his reasons as follows:

The courts have held that where the subsequent agreement of purchase and sale preserves the right of a mortgagor to redeem right up to closing, then this is a right which may be exercised by the mortgagor.

In National Trust v. Saad, 10 R.P.R. (3d) 145 Abbey J. held that a similar clause gave a mortgagor a continuing right of redemption.

I have some difficulty with this conclusion.

The law should strive for certainty. This is so particularly where title to land is involved. There is a difference between an agreement where the parties affirmatively stipulate that the mortgagor shall have the right of redemption up to the date of closing and an agreement which simply recognizes that a mortgagor has certain rights at law but does not extend those rights. If I were dealing with this clause at first instance I would have concluded that this schedule simply recognizes that until the agreement of purchase and sale crystallizes by the satisfaction of all conditions and the waiver of all other terms that agreement is not binding and the right of the mortgagor to redeem continues, but once the agreement crystallizes the right of redemption is lost.

I am not dealing with this clause at first instance however. Abbey, J. has construed this clause and his construction represents the law of this province until reversed by a higher court.

Under the circumstances the mortgagor has a right to redeem prior to closing.

Analysis

19 In my view, on the facts before Wright J. at the time Logozzo issued his notice of application, there are a number of reasons why he was not entitled to redeem the land secured by the mortgage.

I

20 The first reason raises the issue of whether, under s. 22(1)(a) of the Mortgages Act , Logozzo was entitled to redeem the property after TD had entered into a binding agreement of purchase and sale with Grann.

21 It is common ground that absent paragraph 2 of the schedule, s.22(1)(a) permitted Logozzo to redeem the property "at any time before sale under the mortgage". The effect of this provision is to extend the time to redeem from the time in the notice of sale — May 25, 1998 — to the time of the sale of the property pursuant to the power of sale in the Logozzo — TD mortgage.

22 Section 22 of the present Act originally formed part of s. 19a of the Mortgages Act , R.S.O. 1950, c. 239, having been enacted in 1953: S.O. 1953, c. 66, s. 1. Section 19a was divided into two sections in R.S.O. 1970, c. 279, with s. 21 of the 1970 Act being s. 22 of the present Act. It has remained unchanged since 1970. The purpose of s. 21(1), of the 1970 Act, and its application, are outlined in Rayner & McLaren, Falconbridge on Mortgages , 4th ed., (1977) at 721-22: – 65 –

... [I]t permits the mortgagor to put the mortgage in good standing at any time before sale upon payment of any money due, 'exclusive of the money not payable by reason merely of lapse of time' together with payments of costs. Payment must, however, be made or tendered before an agreement for sale has been entered into by the mortgagee with a third party even where the agreement is said to be subject to the right of the mortgagor to redeem or put the mortgage into good standing. Before a mortgagor can obtain the benefit of s. 21 he must pay all arrears for such payment is a condition precedent to relief . A vague hope of the mortgagor to find further financing, even where the security is ample is not sufficient reason to stay the sale proceedings. [Emphasis added.]

23 As authority for the proposition that the right to redeem must be exercised before the mortgagee has entered into an agreement of purchase and sale with a third party, "even where the agreement is said to be subject to the right of the mortgagor to redeem or put the mortgage into good standing", the authors rely on, inter alia, Mission Construction Ltd. v. Seel Investments Ltd., [1973] 2 O.R. 190 (Ont. H.C.) .

24 In Mission Construction , a mortgagor applied for an order to stay the sale of his property under power of sale to enable him to put the mortgage in good standing. At the time the application was commenced, the mortgagee had accepted an offer to purchase the property. In dismissing the application, Lieff J. stated at 191-92:

Section 21(1)(a) provides that a mortgagor may put a mortgage in good standing "at any time before sale under the mortgage". The acceptance of an offer to purchase constitutes a "sale", so that the applicant lost its rights under this section on February 28, 1973. It was argued, however, that this right has remained in existence to the present date due to the following clause in the offer to purchase:

Acceptance by the Vendor hereof shall be subject to the rights if any of the registered owner of the property to redemption or to put the Vendor's mortgage in good standing.

I cannot accept this argument. The right of the applicant under s. 21(1)(a) to put the mortgage in good standing ended on the acceptance of the offer to purchase. The "rights if any" referred to in the above clause include only those rights whose existence was not terminated by the acceptance of the offer, such as the right to redemption upon proof that the sale was fraudulent or improper.

25 This court agreed with this interpretation of former s. 21(1)(a) of the Act in Theodore Daniels Ltd. v. Income Trust Co. (1982), 37 O.R. (2d) 316 (Ont. C.A.) . On behalf of the court, Lacourcière J.A. stated at 319:

The relief granted to the mortgagor may be obtained pursuant to s. 21(1)(a) at any time before sale under the mortgage. Thus the mortgagor may perform the covenant or pay the arrears, etc., before any action is commenced, after a notice of exercising power of sale has been served but before the actual sale. Sale in this context has been interpreted as meaning acceptance of an offer. See Re Mission Construction Ltd. and Seel Investments Ltd., [1973] 2 O.R. 190 at 191, 33 D.L.R. (3d) 286 .

Thus, a contract of sale entered into by the mortgagor after the mortgagee has entered into a contract of sale to a third party in the exercise of his or her power of sale, can have no effect on the mortgagee's exercise of the power of sale.

26 Almost 90 years ago, before there was legislation on the subject, the court considered whether a mortgagor could redeem the property after the mortgagee had accepted an offer to purchase the property which was being sold under power of sale: Standard Realty Co. v. Nicholson (1911), 24 O.L.R. 46 (Ont. H.C.) . In this case, the mortgagor presented the mortgagee with a certified cheque for the sum due on the mortgage, which the mortgagee rejected as the land was subject to an agreement of purchase and sale, which was later completed.

27 Riddell J. allowed the purchaser's action against the mortgagor, Nicholson, for possession of the property. It was significant to him that the purchaser had acquired rights under the contract it had entered into with the mortgagee. At p. 55 he stated:

A binding contract for sale being entered into by the mortgagee, before any notice of any intention to redeem, I think that Mrs. Nicholson lost any right she previously had so to redeem.

In Kenney v. Barnard (1910), 17 O.W.R. 889, 2 O.W.N. 470 , the second mortgagee, on the day of a sale under the first mortgage, called on the purchaser and offered him the amount of his deposit and $25 for his trouble — he also made a legal tender to the first mortgagee of the amount due, etc. Mr. Justice Sutherland says (17 O.W.R. p. 900): "The tender made after the sale was so made at a time when both vendor and purchaser were bound by the agreement that had been made. ... The vendor would have been willing to cancel the sale and permit the plaintiff to redeem. The purchaser ... was unwilling to forgo his bargain. ... He declined, and could not, I think, be compelled to do so." An action brought by the second mortgagee was dismissed with costs. I follow this decision, and wholly agree in my learned brother's conclusion. – 66 –

28 In addition, Riddell J. discussed the distinction between a mortgagor's right to redeem after a final order of foreclosure, and the right to do so after a sale under power of sale. He pointed out, at pp. 55-6, that the authorities permit a final order of foreclosure to be opened up in appropriate circumstances to allow a mortgagor to redeem. This right, however, depends on the exercise of a discretion by the court depending upon the circumstances of each particular case. On the other hand, to permit a mortgagor to redeem after the property has been sold upon power of sale, as in this appeal, would require the court to interfere with rights accruing to the purchaser and the mortgagee under their contract of purchase and sale. In other words, it would interfere with the mortgagee's contractual right to sell under power of sale contained in the mortgage entered into with the mortgagor, as well as the contractual rights of the mortgagee and the purchaser arising from the contract of sale under power of sale.

29 A similar approach was taken by Crossman J. in Waring v. London & Manchester Assurance Co. (1934), [1935] Ch. 310 (Eng. Ch. Div.) . In that case, a mortgagee, exercising a power of sale pursuant to s. 101 of the Law of Property Act , 15 Geo. 5, c. 20, had entered into a contract to sell the mortgaged property. Subsequently, the mortgagor tendered the monies due under the mortgage and sought an injunction to prevent the completion of the sale on the ground that it had not been completed.

30 In refusing to issue an injunction on this ground, Crossman J. had this to say at pp. 317-18:

The contract is an absolute contract, not conditional in any way, and the sale is expressed to be made by the company as mortgagee. If, before the date of the contract, the plaintiff had tendered the principal with interest and costs, or had paid it into Court in proceedings, then, if the company had continued to take steps to enter into a contract for sale, or had purported to do so, the plaintiff would, in my opinion, have been entitled to an injunction restraining it from doing so. After a contract has been entered into, however, it is, in my judgment, perfectly clear (subject to what has been said to me to-day) that the mortgagee (in the present case, the company) can be restrained from completing only on the ground that he has not acted in good faith and that the sale is therefore liable to be set aside . ... In my judgment, s. 101 of that Act, which gives to a mortgagee power to sell the mortgaged property, is perfectly clear, and means that the mortgagee has power to sell out and out, by private contract or by auction, and subsequently to complete by conveyance; and the power to sell is, I think, a power by selling to bind the mortgagor. If that were not so, the extraordinary result would follow that every purchaser from a mortgagee would, in effect, be getting a conditional contract liable at any time to be set aside by the mortgagor's coming in and paying the principal, interest, and costs. Such a result would make it impossible for a mortgagee, in the ordinary course of events, to sell unless he was in a position to promise that completion should take place immediately or on the day after the contract, and there would have to be a rush for completion in order to defeat a possible claim by the mortgagor . [Emphasis added]

31 In Waring , the mortgagor had also supported his request for an injunction on the ground that the pending sale could not be allowed to stand because it was made at a gross under-value. This was a ground which Logozzo advanced before Wright J., which he rejected. He raised it again before this court, submitting that the price for which TD agreed to sell the property to Grann is so low as to amount to fraud.

32 In Waring , Crossman J. found no evidence showing anything like a lack of good faith in the mortgagee's conduct of the sale. In a passage which has particular relevance to this appeal, he sated at 319:

The law, as stated by Kay J. in Warner v. Jacob (I) [20 Ch.D. 220 at 224 ] is perfectly clear. The learned judge there says:

.... a mortgagee is strictly speaking not a trustee of the power of sale. It is a power given to him for his own benefit, to enable him the better to realize his debt. If he exercises it bona fide for that purpose, without corruption or collusion with the purchaser, the Court will not interfere even though the sale be very disadvantageous, unless indeed the price is so low as in itself to be evidence of fraud." In my judgment it is impossible on the facts of this case to conclude that the price is so low as in itself to be evidence of fraud.

I am satisfied that Wright J. was correct in rejecting this ground.

33 Van Minnen Construction Ltd. v. Murphy (1977), 19 O.R. (2d) 125 (Ont. H.C.) is another case in which it was held that it was too late for a mortgagor to redeem after the property had been sold at auction under power of sale by the mortgagee. The mortgagor, who had tendered sufficient funds to discharge the mortgage after the mortgagee had sold the property, but before the transaction was completed, sought a declaration that it was entitled to redeem the property.

34 Krever J. rejected the mortgagor's submission that on the date when the tender was made a sale had not occurred because the transaction had not been completed. Applying Mission Construction , he stated that the – 67 – closing of the transaction need not occur before it can be said that a sale within the meaning of former s. 21 of the Mortgages Act has occurred. Krever J. went on to say at 131:

See also the judgment of Vannini, D.C.J., in Re Hal Wright Motor Sales Ltd. and Industrial Development Bank (1975), 8 O.R. (2d) 76, 57 D.L.R. (3d) 172 , to the same effect. References may also be made to Arnold v. Bronstein et al., [1971] 1 O.R. 467, 15 D.L.R. (3d) 649 , in which Lacourcière, J., refused to restrain a mortgagee from selling under a power of sale where the mortgagor had not tendered the principal, interest and costs payable. He held that postponement of the sale on the mortgagor's indefinite hope of finding new financial backing would constitute an unwarranted interference with the mortgagee's contractual rights . At p. 468 O.R., p. 650 D.L.R., Lacourcière, J., said (with reference to the equitable remedy of an injunction, which is not in issue in the instant case):

The general rule developed from numerous cases is that a mortgagee, acting in good faith and without fraud, will not be restrained from a proper exercise of his power of sale, except upon tender by the mortgagor of the principal moneys due, interest and costs.

In my view, in the absence of bad faith or fraud on the part of the mortgagee, the mortgagor is not entitled to relief unless he has tendered the arrears and costs before the mortgagee has entered into a binding commitment to convey the property to a purchaser . [Emphasis added.]

35 Mr. Justice Lacourcière's statement that a mortgagor is not entitled to relief under s. 22(1)(a) of the present Act unless he has tendered the arrears before the mortgagee has entered into a binding contract to sell the property is in conformity with the interpretation placed on s. 19a(1) of the 1950 Act (ss.22 and 23 of the 1990 Act) by Schroeder J.A. on behalf of this court in Scarborough (Township) v. Greater Toronto Investment Corp. (1956), 4 D.L.R. (2d) 396 (Ont. C.A.) at 404-5. In my view, Scarborough makes it clear that payment, or tender, of the amount due under the mortgage and of "any expenses necessarily incurred by the mortgagee" before the mortgagee accepts an offer to purchase the land is a condition precedent to the mortgagor being able to utilize s. 22(1)(a) to preclude a mortgagee from selling the property by power of sale. At p. 405, Schroeder J.A. made reference to the well-established principle "that a mere statement of readiness to pay is not a tender".

36 Applying the above principles, at the time Logozzo commenced his application to prevent Grann from completing the purchase of the property, it was too late for him to redeem the property. Within the meaning of s. 22(1)(a), TD had already sold the property to Grann. Moreover, Logozzo had not fulfilled the necessary condition precedent to engage s. 22 (1)(a) as he had failed to pay, or tender, the amount due to discharge the mortgage. At best, it can be said that he hoped to acquire the funds required to repay the mortgage debt by selling the property to Purnell.

II

37 Therefore, it comes down to whether paragraph 2 of the schedule to the Grann-TD agreement of purchase and sale makes any difference. Wright J. felt compelled by precedent to find that it did. He felt bound to follow the decision of Abbey J. in National Trust Co. v. Saad (1997), 33 O.R. (3d) 419 (Ont. Gen. Div.) . In my view, Wright J. erred when he felt bound to apply Saad , which I seriously doubt was decided correctly.

38 In Saad , the mortgagee, which was selling the property under power of sale, had entered into an agreement to sell the property which was conditional for ten days upon the purchaser obtaining a new first mortgage. The ten-day period ended on January 10, 1997. The agreement contained a term, in language identical to that in the Grann-TD agreement of purchase and sale, stating that the mortgagor had the right to redeem up to the time of the waiver or expiry of the condition. On January 9, 1997, the mortgagor's solicitor requested a statement of the mortgage from the mortgagee and indicated that the mortgagor was in a position to redeem. Relying on s. 22(1) of the Mortgages Act , the mortgagor succeeded in obtaining a declaration that he was entitled to redeem the property.

39 In granting the declaration, Abbey J. stated at pp. 421-22:

It does not seem to me that the law pertaining to the interpretation of what is now s. 22(1)(a ) is in any real doubt. The general principle which is set out in Mission Construction Ltd. v. Seel Investments Ltd., [1973] 2 O.R. 190, 33 D.L.R. (3d) 286 (H.C.J.) , is that the acceptance of an offer constitutes a sale within the meaning of the section. Subsequent authorities, however, and in particular the decisions in Miranda v. Wong (Ont. H.C.J., April 4, 1986) an unreported decision of Steele J., Weiss v. Standard Trust Co. (Ont. Gen. Div., August 5, 1993) an unreported decision of Wilson J., and Canada Permanent Trust Co. v. Rieckenberg (Ont. Dist. Ct., December 5, 1983), an unreported decision of Kurisko J., have, as it were, pronounced an addendum to the general principle, and that is that if the agreement of purchase and sale itself contemplates a right of redemption continuing until a date after the date of the agreement, then the mortgagor is considered to have a right of redemption consistent with the terms of the agreement . – 68 –

The clause to which I earlier referred and which is contained in the subject agreement of purchase and sale specifically provides that it is understood between the purchaser and the vendor mortgagee that the mortgagor has a right to redeem the property up to the date of waiver or fulfillment of the financing conditions set out in the agreement. The clause also provides that in the event of redemption the agreement is null and void.

I am satisfied, because of the inclusion of that particular clause in the subject agreement of purchase and sale, and based upon the authorities to which I have referred, that the applicants are to be considered as having a continuing right of redemption as of January 10, 1997. [Emphasis added.]

40 Although the mortgagor had neither paid, nor tendered, the amount required to discharge the mortgage as required by the authorities, this did not prevent Abbey J. from granting the mortgagor the opportunity to redeem the property prior to the date fixed for the closing of its sale under power of sale. In this regard, at p. 423 he stated:

I am satisfied, in this case, that the applicant should be taken to have complied with the provisions of s. 22(1)(a ) of the Mortgages Act . The steps taken by the applicants on January 9, prior to the expiration of the right of redemption, having regard to the terms of the agreement of purchase and sale are sufficient, in my view, to activate the section and cause the court, in the determination of the equities between the parties, to find the applicants entitled to a right of redemption.

41 Apart from the question of whether Abbey J. was correct in declaring that the mortgagor had the right to redeem in the absence of payment, or tender, of the amount required to discharge the mortgage, in my view, Saad , and the authorities relied on by Abbey J., are distinguishable on their facts from this appeal.

42 In Saad , Miranda [Miranda v. Wong (April 4, 1986), Doc. RE 821/86 (Ont. H.C.) ], Weiss [Weiss v. Standard Trust Co. (August 13, 1993), Doc. 92-CQ-12383 (Ont. Gen. Div.) ] and Rieckenberg [Rieckenberg v. Canada Permanent Trust Co. (December 5, 1983), Kurisko J. (Ont. Dist. Ct.)], as well as in Nalisa Investment Ltd. v. National Bank of Canada (1980), 28 Chitty's L.J. 187 (Ont. S.C.) , the agreement of purchase and sale entered into between the mortgagee selling under power of sale and the purchaser was subject to a condition. In Saad , the condition was the ability of the purchaser to obtain financing. In Miranda , Rieckenberg and Nalisa the agreement was conditional upon the mortgage not being redeemed up to the date of closing. In Weiss there is a condition which appears to have a similar effect. As I will explain, in this appeal, the agreement of purchase and sale, like the agreement of purchase and sale in Mission Construction , was not a conditional agreement, but contained an understanding that the mortgagor had the right to redeem in certain circumstances.

43 The effect of the financing condition in Saad , and the conditions in the cases which it followed, was to defer the coming into force of a sale within the meaning of s. 22(1)(a) of the Mortgages Act until the condition was fulfilled or waived. In Saad , a sale would occur upon the fulfillment or waiver of the financing condition. In the event that the purchaser was unable to obtain financing, obviously there would be no agreement as the condition had not been fulfilled. However, in reaching his decision, Abbey J. did not do so on the basis of Miranda , and the other cases, but on the basis of the provision in the agreement of purchase and sale, to which the mortgagor was not a party. In my view, therefore, Abbey J. was incorrect in his observation that the authorities on which he relied "pronounced an addendum to the general principle" that acceptance of an offer constitutes a sale within the meaning of s. 22(1)(a), "and that if the agreement of purchase and sale itself contemplates a right of redemption continuing until a date after the agreement, then the mortgagor is considered to have a right of redemption consistent with the terms of the agreement." Those authorities, in my view, do not support this proposition. Nor does Saad . In each of the cases followed by Abbey J. the agreement of purchase and sale entered into under the power of sale was a conditional agreement. It appears to have been the opinion of the judges deciding those cases that a conditional agreement of purchase and sale entered into under power of sale does not constitute a "sale under the mortgage" within the meaning of s. 22(1)(a) of the Mortgages Act . The correctness of this proposition need not be decided on this appeal.

44 Moreover, in my view, the provision of paragraph 2 of the schedule to the Grann-TD agreement of purchase and sale does not render it a conditional agreement. Once again, I repeat it for convenience:

The purchaser understands and agrees that the mortgagor has the right to redeem the property up to the time of waiver or expiration of all rights of termination or fulfillment of all conditions and this agreement is subject to that right. In the event of redemption by the mortgagor, this agreement shall be null and void and any deposit monies will be refunded in full without interest. [Emphasis added.]

On its face, this clause represents an understanding and agreement between Grann and TD that there are circumstances in which TD may permit the mortgagor to redeem the property. As such, it has a similar effect to the similar clause in Mission Construction . However, this cannot serve to confer on Logozzo a right to redeem beyond the time permitted by s. 22(1)(a). This provision is likely for the benefit of TD. It gives TD the opportunity to make the – 69 – best deal possible in realizing on its security notwithstanding the effect of s.22(1)(a), and without incurring any liability to the purchaser. For example, if the amount for which it sold the property to Grann was insufficient to retire the mortgage debt, it reserved for TD the right to permit Logozzo to redeem on the payment, or tender, of a sufficient amount "up to the time of waiver or expiration of all rights of termination or fulfillment of all conditions". However, as between Logozzo and TD, it created no rights, nor did it provide Logozzo the foundation to prevent the completion of the Grann - TD transaction. As I have pointed out, in any event, at the time he brought his application, Logozzo had not effected a redemption as he had neither paid, nor tendered, the amount due on the mortgage.

45 In my view, although paragraph 2 permits Logozzo to redeem if certain circumstances are met, he could not enforce this benefit against Grann or TD for the reason that he was not a party to the agreement of purchase and sale. As a general rule, the doctrine of privity of contract provides that a contract can neither confer rights, nor impose obligations, on third parties. Paragraph 2 may permit the mortgagee to allow the mortgagor to redeem subsequent to the time of a binding agreement of purchase and sale. Indeed, as I stated earlier, TD has no objection to the court permitting Logozzo to redeem provided the court protects it from liability should Grann decide to enforce its contractual rights, as paragraph 2, in effect, provides. However, it is primarily the mortgagor, whose right to redeem is governed by s. 22(1)(a), who is seeking to enforce a term in a contract to which he is not a party.

46 As for the purchaser, if he or she is content to enter into an agreement of purchase and sale that contains such a provision, he or she is taken to have assumed the risk that the transaction may not close. The provision leaves the vendor free to accept a proper redemption within the time frame contained in the provision and return the purchaser's deposit, without incurring liability to the purchaser. Thus, although it is apparent that Grann acted in good faith in submitting his offer, he did so knowing that TD could terminate the agreement by permitting Logozzo to redeem the property within the time frame contained in the provision, in which event the agreement becomes null and void and TD must return his deposit. Grann is not prepared to relinquish the rights which he acquired under the agreement of purchase and sale and to go along with TD's willingness to permit Logozzo to redeem. TD's willingness to do so, as stated earlier, is conditional upon the court protecting it from any liability it may have to Grann if the court declares the agreement of purchase and sale null and void. However, had Logozzo effected a proper redemption in compliance with the provision in paragraph 2, Grann's rights under the agreement of purchase and sale would have been at an end.

47 It is helpful to examine the language of paragraph 2 which, in my view, is needlessly convoluted. As I read the penultimate sentence of that paragraph, it is similar, in effect, to the provision in the agreement of purchase and sale in Mission Construction , which Leiff J. found did not preserve the mortgagor's right to redeem. The clause in that case provided that the mortgagee's acceptance of the offer was "subject to the rights" of the mortgagor to redeem the property or to put the mortgage in good standing. In this appeal, the agreement of purchase and sale is "subject to [the] right" of the mortgagor to redeem the property "up to the time of waiver or expiration of all rights of termination or fulfillment of all conditions". The only difference between the two clauses is that in this appeal the mortgagor's right to redeem terminates on the occurrence of certain events, while in Mission Construction the right to redeem is not subject to termination.

48 As I have indicated, the clause in paragraph 2 does not render the TD-Grann agreement of purchase and sale a conditional agreement. It does not make the right of Grann to complete the purchase of the property dependent on the happening of a future event, such as the purchaser obtaining the funds to complete the purchase, as in Saad , or the mortgage not being redeemed prior to closing, as in Miranda . The clause simply contains an acknowledgement that the mortgagor has the right to redeem the property up to a particular time. There are no conditions in the agreement to be fulfilled.

49 This analysis takes me back to Saad . As I have indicated, the agreement of purchase and sale in that case was conditional for ten days on the purchaser obtaining financing. It was before the ten-day period had elapsed that there was an indication that the mortgagor was in a position to redeem. The agreement of purchase and sale contained the same clause found in paragraph 2 of the agreement of purchase and sale in this appeal. It is somewhat unclear from Abbey J's reasons whether he felt the mortgagor was entitled to redeem because the agreement of purchase and sale was conditional as decided in the Miranda line of cases, or because he found the mortgagor had the right to do so by virtue of the clause in the agreement of purchase and sale. In either event, it is my view that Saad was not decided correctly. If the decision rests on the ground that there was not a sale within the meaning of s. 22(1)(b) of the Mortgages Act because the agreement was conditional, assuming the correctness of the Miranda line of cases, the mortgagor was unable to rely on s. 22(1)(b) and redeem the property because he had neither paid, nor tendered, the redemption funds. If the decision rests on a right to redeem found in the clause of the agreement of purchase and sale, in addition to the absence of payment or tender, this was not a right which the mortgagor could enforce as he was not a party to that agreement. In addition, a decision based on this ground is contrary to Mission Construction .

50 As I stated earlier, it is TD's position that it remains open to the court to permit Logozzo to redeem as the time had not been reached for Grann to complete his examination of title when Logozzo commenced his application. – 70 –

TD submitted, therefore, that it could agree to a redemption of the property as the time for the "waiver or expiration of all rights of termination" of the agreement, as contained in paragraph 2, had not expired.

51 In making this submission, TD relied on the following language in paragraph 10 of the agreement of purchase and sale: "If within the specified times referred to in paragraph 8 any valid objection to title ... is made in writing to Vendor and which Vendor is unable or unwilling to remove, remedy or satisfy and which purchaser will not waive this agreement ... shall be at an end ..." In my view, this language does not create a right of termination. In any event, as the period in which Grann was permitted to examine the title had not expired when the application was commenced, it was premature for TD, or Logozzo, to place any reliance on this aspect of the clause in paragraph 2.

52 My interpretation of paragraph 10 is based on the reasons for judgment of Danckwerts L.J. in Property & Bloodstock Ltd. v. Emerton (1967), [1968] Ch. 94 (Eng. C.A.) , a power of sale and redemption case, in which it was held that conditions respecting title in the usual agreement of purchase and sale are just that — a mere matter of title and, therefore, one of the usual terms found in an agreement of purchase and sale - with the result that the agreement is an unconditional contract of sale. It is also noteworthy that the Court of Appeal in Emerton approved Crossman J.'s decision in Waring , observing, at p. 115, that it "was plainly correct".

53 In summary, notwithstanding that the doctrine of privity of contract precluded Logozzo from enforcing the apparent benefit which was conferred on him by the language of paragraph 2, as between Grann and TD, paragraph 2 entitled TD to accept a proper redemption by Logozzo "up to the time of waiver or expiration of all rights of termination or fulfillment of all conditions" contained in their agreement, and to walk away from the agreement without incurring any liability to Grann. However, as I have explained, in the circumstances of this appeal TD cannot rely on, and enforce, paragraph 2 for three reasons. Logozzo had not effected a proper redemption at the time his application was brought, as he had neither paid, nor tendered, the appropriate amount of money owing on the mortgage. Paragraphs 8 and 10 of the agreement did not, as TD contended, give Grann a right to terminate it which he had not waived and which had not expired. Finally, the agreement was not conditional.

54 Before leaving this analysis, it should be acknowledged that in certain circumstances the courts have permitted a third party to enforce a benefit or right established in its favour pursuant to the terms of a contract. For example, in London Drugs Ltd. v. Kuehne & Nagel International Ltd., [1992] 3 S.C.R. 299 (S.C.C.) , the Supreme Court of Canada introduced what was intended as a principled exception to the doctrine of privity of contract in the context of a limitation of liability clause in a standard form contract for the storage of a transformer. See, also, Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd. , a judgment of the Supreme Court of Canada, released September 10, 1999, [1999] 9 W.W.R. 380 (S.C.C.) . It was not argued in this appeal that the principle established in London Drugs should be applied to permit Logozzo to enforce the right to redeem contained in paragraph 2. However, were I inclined to apply London Drugs , it is my view that Logozzo would have failed for the reasons which I have summarized in the preceding paragraph.

Conclusion

55 As stated earlier, TD and Grann both regard their agreement of purchase and sale to be in force awaiting the release of this judgment. For all of the above reasons, they may now proceed to complete their contract, freed from the unhappy interference by Logozzo at the eleventh hour.

56 In the result, I would allow the appeal and set aside the order of Wright J. Grann is entitled to the costs of the application, the cross-applications and the appeal from Logozzo and TD.

Goudge J.A. (dissenting):

57 I have had the benefit of reading the thorough and comprehensive reasons for judgment of Borins J.A. allowing the appeal. With respect, however, I approach this matter rather differently and have reached a different result. My reasons for doing so are as follows.

58 There were three applications heard together by Wright J.: one by Mr. Logozzo, the mortgagor; one by the Toronto-Dominion Bank, the mortgagee; and one by Mr. Grann, the purchaser from the Bank pursuant to its power of sale.

59 By agreement, the rights of all three parties were preserved as of November 12, 1998. Those rights remain in suspension pending the determination of this appeal.

60 In my view, the fundamental question before Wright J. was whether on November 12, 1998, Logozzo was able to redeem the mortgaged property or whether to do so would violate Grann's rights as purchaser from the Bank. – 71 –

61 Logozzo argued that because of s.22(1)(a) of the Mortgages Act , R.S.O. 1990, c.M.40, he was entitled to redeem as of that date. The Bank supported him, indicating that it wished to have him redeem provided that to do so would not violate Grann's rights. Grann took the opposite position, arguing that because of his purchase from the Bank, there was no legal basis upon which Logozzo could redeem.

62 In my opinion, the resolution of this appeal depends on the contract between the Bank and Grann. The critical term of that contract is paragraph 2 of Schedule A which forms part of the contract of purchase and sale. That paragraph reads as follows:

2. It is further understood that on the date of acceptance of this offer there is default under the terms of the mortgage which entitles the Vendor to exercise the Power of Sale. The only evidence of the default, which the Purchaser may require, shall be a statutory declaration by the Vendor setting forth the facts entitling the Vendor to sell under the Power of Sale, including the particulars of the notice of exercising the Power of Sale, the names of the persons upon whom service of the notice has been effected, and declaring that default under the mortgage entitling the Vendor to exercise the Power of Sale has continued up to and including the date of acceptance of this offer and to the time of closing. The Purchaser understands and agrees that the mortgagor has the right to redeem the property up to the time of waiver or expiration of all rights of termination or fulfilment of all conditions, and this Agreement is subject to that right. In the event of redemption, by the mortgagor, this agreement shall be null and void and only deposit monies paid will be refunded without interest.

63 This paragraph constitutes the agreement of these two parties that the Bank can permit Logozzo to redeem the property "up to the time of waiver or expiration of all rights of termination or fulfilment of all conditions" and further, that if that happens, Grann's agreement with the Bank is rendered null and void.

64 This paragraph is designed to preserve for the Bank its right to be repaid in full by the redeeming mortgagor right up to the point at which the purchaser to whom the Bank is selling no longer has a legal escape hatch from the transaction. That is the point at which the Bank can look with certainty to the sale to be repaid. The purchaser contracts with full knowledge that until that point the Bank is entitled to be repaid by permitting the mortgagor to redeem, thereby voiding the contract of purchase and sale.

65 The question then is whether as of November 12, 1998, the deadline had passed for the Bank to permit Logozzo to redeem. I do not think that it had.

66 Paragraph 10, together with paragraph 8 as amended of the agreement of purchase and sale, provides that the purchaser has until November 13, 1998 to make any valid objection to title or to any outstanding work order or to the unlawfulness of the present use or to the lack of fire insurance. If the vendor does not satisfy the objection the purchaser may waive it. Otherwise the agreement is terminated. This provision gives Grann the right to terminate the contract up to November 13, 1998 if he refuses to waive an unsatisfied and valid requisition. Since Grann had not waived this right, until it expired on November 13, the Bank could not be certain that Grann was lawfully obliged to complete the transaction. Until then the Bank could not look with certainty to the sale to be repaid.

67 This, I think, is precisely the kind of provision contemplated by paragraph 2 of Schedule A. As I have said, its purpose is to entitle the Bank to be repaid by a redeeming mortgagor up to the point at which the purchaser under power of sale ceased to have a legal escape route from the transaction. At that point, the Bank can look with certainty to the sale as the basis for repayment and the justification for permitting redemption vanishes.

68 As of November 12, 1998, Grann's right under paragraph 10 had neither been waived, nor had it expired. The Bank could not yet be certain that it could look to the sale to Grann as the basis upon which it would be repaid. Hence, as of that date the contract of purchase and sale entitled the Bank to allow Logozzo to redeem. It could do so with no infringement of Grann's rights since the redemption would render the contract between Grann and the Bank null and void.

69 In summary, therefore, I conclude that as of the crucial date, November 12, 1998, Logozzo was able to redeem the property because the Bank has a contractual right to let him do so and it is willing to exercise that right.

70 While my conclusion differs from that of my colleague, it also differs from that reached by Wright J. He found that Logozzo had a right to redeem, which existed not only on November 12, 1998, but ran to the date for closing. In my view, Logozzo could redeem because the Bank had the contractual right to let him do so, but only up to the deadline provided in paragraph 10 of its contract with Grann, namely, November 13, 1998.

71 However, in fashioning the necessary declaration I think account should be taken of the fact that all rights have been in suspension since November 12, 1998. Some allowance should be made for start up time when the clock is restarted. Hence, I would declare that as of November 12, 1998, the Bank had the right to allow Logozzo to – 72 – redeem the property. I would further provide that the deadline for satisfying requisitions in the contract of purchase and sale be extended for one week from the date of release of this judgment.

72 The conclusion I have reached is contractually founded. It does not depend at all on s. 22(1)(a) of the Mortgages Act . It is, therefore, unnecessary to address the rights accorded to Logozzo by that section in these circumstances. Nonetheless, there are three points that might usefully be made in this connection.

73 First, I would be inclined to the view that if no sale has transpired under the mortgage, the mortgagor has the statutory right to redeem and the court can so declare even if the mortgagor has not tendered the amount owing on the mortgage. The Act does not require a tender as a precondition to possessing the right to redeem. Nor, as I read it, does the case law, unless the mortgagor is also seeking to enjoin the sale under power of sale or unless the mortgagor is seeking a declaration after a sale under the mortgage has occurred where, absent the prior tender, the mortgagor's rights, if any, have vanished.

74 Where there has not yet been such a sale and the mortgagor seeks no more than a declaration that he has the right to redeem, I find it difficult to see the rationale for requiring as a precondition to that relief that the mortgagor tender what is owed. Indeed, if the mortgagor had tendered what is owed, he would be entitled to an order that he has redeemed, not just a declaration that he has the right to do so.

75 Secondly, assuming the correctness of the Miranda [Miranda v. Wong (April 4, 1986), Doc. RE 821/86 (Ont. H.C.) ] line of cases, which my colleague Borins J.A. correctly says we need not decide, I would be inclined to find the contract between the Bank and Grann to be conditional and therefore not a "sale under the mortgage" within s. 22(1)(a) of the Mortgages Act .

76 It seems to me that as of November 12, 1998, this contract was conditional in the same sense as that, for example, in National Trust Co. v. Saad (1997), 10 R.P.R. (3d) 145 (Ont. Gen. Div.) . In Saad , if satisfactory financing did not materialize by the required date the purchaser could either waive this condition or terminate the contract. In this case, if an unsatisfied and valid objection to title materialized by the required date the purchaser could waive this condition or terminate the contract.

77 While Danckwerts L.J. in Property & Bloodstock Ltd. v. Emerton (1967), [1968] Ch. 94 (Eng. C.A.) defined as unconditional a contract containing a condition as to title, this case can be distinguished on the basis that it was decided in the context of the interpretation of a statute defining the mortgagee's power to sell, not the circumstances under which a mortgagor may redeem.

78 In principle it would seem to make sense that a sale that was conditional, as this one was as of November 12, 1998, should not terminate the mortgagor's right to redeem. At that point the sale remains contingent. It may never happen. Until the contingency is removed and the sale becomes a certain basis for repayment of the mortgage debt, the mortgagor ought not to be deprived of the right to serve as the basis for repayment by redeeming the property. Otherwise, the mortgagee may be left with no sale and a mortgagor with no right to redeem.

79 In summary I would vary the order below as I have indicated. Since this represents material success for Logozzo and the Bank they should each have their costs of this appeal.

Appeal allowed.

1994 CarswellOnt 753

42 R.P.R. (2d) 283, 21 O.R. (3d) 350 Montreal Trust Co. of Canada v. Raptis

Ontario Court of Justice (General Division)

Cavarzan J.

Heard: November 16, 1994 Judgment: November 25, 1994 Docket: Doc. 1948/94

Counsel: Gary L. Petker, for applicant/respondent. – 73 –

B.T. Paquette, for respondents/applicants Alberto Alves and Maria Alves.

Subject: Property; Corporate and Commercial

Mortgages --- Redemption — When redemption available.

Mortgages — Redemption — When redemption available — After sale of equity by mortgagee — Mortgagee's acceptance of offer to purchase under power of sale constituting "sale" within meaning of s. 22(1)(a) of Mortgages Act and extinguishing mortgagors' right of redemption — No special circumstances existing to extend time for redemption — Mortgages Act, R.S.O. 1990, c. M.40, s. 22(1)(a).

The respondent mortgagors mortgaged their property to the applicant trust company. The mortgage went into default, and the trust company commenced power of sale proceedings. The mortgage was not redeemed. The trust company accepted an offer to purchase from the respondent G. Prior to title being conveyed to G, the mortgagors executed a deed to the respondents A.

The trust company commenced proceedings seeking a declaration that the sale by the mortgagors to A was null and void by virtue of the trust company having accepted another offer to purchase under its power of sale. The trust company submitted that under s. 22(1)(a) of the Mortgages Act (Ont.), the mortgagors' right of redemption had ceased when they accepted G's offer to purchase. The mortgagors cross-applied for an order seeking the right to redeem the mortgage, and staying the trust company's power of sale proceedings. The mortgagors argued that certain provisions contained in a schedule to G's offer to purchase contemplated a redemption prior to the closing, and that there existed special circumstances allowing for redemption prior to closing.

Held:

The application was allowed, and the cross-application was dismissed.

The trust company's acceptance of G's offer to purchase under power of sale constituted a "sale" within the meaning of s. 22(1)(a) of the Act. The mortgagors' right to redeem was thus extinguished by the trust company's acceptance of the offer. Moreover, the trust company had demonstrated an intention to preclude redemption after an offer to purchase had been accepted. There was no evidence that the sale was fraudulent or improper, or that there existed any other special circumstances that justified redemption of the mortgage after the date on which the trust company had accepted G's offer.

Annotation

Almost every agreement of purchase and sale in respect of property being sold under power of sale will contain a qualifier allowing the mortgagee cum vendor to refuse to close if the mortgage is redeemed prior to closing (a "redemption-out clause"). The Raptis case is an example of what can happen in the absence of a redemption-out clause.

In Raptis, the mortgagee found itself with both redemption funds from its mortgagor and an otherwise binding agreement of purchase and sale (without a redemption-out clause) with an innocent third party. Taking the moral high road, the mortgagee opted to close with the third party purchaser instead of its customer, arguing that the mortgagors' right to redeem ended with the acceptance of the offer. Mr. Justice Cavarzan sided with the mortgagee's interpretation of s. 22(1)(a) of the Mortgages Act, R.S.O. 1990, c. M.40, and concluded that acceptance of an offer does in fact constitute a "sale," upon the happening of which the mortgagor loses its right of redemption under the Mortgages Act.

It is important to note that, while Raptis may be authority for the fact that a "sale" for the purposes of s. 22(1)(a) of the Mortgages Act occurs on acceptance of an offer where no redemption-out clause exists, the converse conclusion doesn't necessarily follow. That is, a "sale" for the purposes of s. 22(1)(a) of the Mortgages Act can also occur even if there is a redemption-out clause (see, for example, Theodore Daniels Ltd. v. Income Trust Co. (1982), 25 R.P.R. 97, 37 O.R. (2d) 316, 135 D.L.R. (3d) 76 (C.A.), and Mission Construction Ltd. v. Seel Investments Ltd., [1973] 2 O.R. 190, 33 – 74 –

D.L.R. (3d) 286 (H.C.), referred to with approval in the decision). However, the courts have not eliminated altogether the possibility of redeeming a mortgage after acceptance by the mortgagee of an offer. For instance, in 618469 Ontario Ltd. v. Szanto (1990), 16 R.P.R. (2d) 100 (Ont. Gen. Div.), Mr. Justice Steele seemed to provide a general "opting-out" for those courts which felt that "special circumstances" existed. Although in Szanto, the court found that extraordinary efforts and expense on the part of the mortgagor to refinance constituted the requisite "special circumstances," it is submitted that weaknesses in the offer itself may also constitute the requisite "special circumstances" (for instance, an offer that is conditional on a great number of events, or has an unusually long time to completion).

Kept within the confines of the Mortgages Act, this holding is all well and good — at least, this annotator cannot identify any really persuasive policy reason rationale why a mortgagor, who has already had a minimum of 35 days' notice (more, if Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, or Farm Debt Review Act, R.S.C. 1985, c. 25 (2nd Supp.), notices had been given), should be entitled to disrupt further an orderly sale of collateral, or why a good faith third party purchaser for value should have his deal upset. Indeed, one probably need not look far to find some legal-economic model that would suggest that any alternative holding in Raptis might dampen the liquidity of distressed real estate, and worsen what is already considered by many to be a disastrous real estate market. While of some theoretical interest, the practical effects of the decision (if in fact the decision can be said to add to the liquidity of the markets) are probably overstated. Notwithstanding the decision in Raptis, the overwhelming number of agreements of purchase and sale entered into by mortgagees under their powers of sale still contain redemption-out clauses, and mortgagees still prefer redeemers to buyers. The reasons for this are simple. Raptis aside, the current legal environment still favours redeeming mortgages over third party buyers because of the ever-present risk of liability for improvident sale, and with the arguably antiquated principle that realized surpluses have to be returned to the mortgagor in any event (prudent legal advice being that redemption leaves the mortgagee with just as much at the end of the day, without the risk of liability for improvident sale).

Some caution should be used, however, when invoking Raptis as an authority outside the ambit of the Mortgages Act. For other purposes (e.g., various taxing statutes), it may be misleading to suggest that a "sale" is affected on acceptance of an offer, especially a conditional offer.

Jeffrey W. Lem

Cases considered:

Mission Construction Ltd. v. Seel Investments Ltd., [1973] 2 O.R. 190, 33 D.L.R. (3d) 286 (H.C.) — applied

Theodore Daniels Ltd. v. Income Trust Co. (1982), 25 R.P.R. 97, 37 O.R. (2d) 316, 135 D.L.R. (3d) 76 (C.A.) — followed

618469 Ontario Ltd. v. Szanto (1990), 16 R.P.R. (2d) 100 (Ont. Gen. Div.) — considered

Statutes considered:

Mortgages Act, R.S.O. 1990, c. M.40 — s. 22(1)(a)

Application for declaration that sale by mortgagors null and void for contravening Mortgages Act (Ont.); cross-application for order seeking redemption of mortgage and staying applicant's power of sale proceedings.

Cavarzan J.: – 75 –

1 The respondents Harold and Angelina Raptis mortgaged their property to the applicant Montreal Trust. The mortgage went into default, and Montreal Trust commenced power of sale proceedings; it entered into an agreement of purchase and sale with the respondent Franz Greisbach. Before title could be conveyed to Greisbach, Harold and Angelina Raptis executed a deed to Alberto and Maria Alves as grantees.

2 Montreal Trust brings this application for a declaration that the Raptis sale to Alves is null and void, for an order removing from title the registration of the deed to Alves, and for a determination of its right to complete the sale to Greisbach.

3 Alberto and Maria Alves have brought a cross-application in which they seek the right to redeem the Raptis mortgage, and an order staying the exercise by Montreal Trust of its power of sale.

4 The issue raised by these applications is whether the agreement between Montreal Trust and Greisbach constitutes a "sale" under section 22(1)(a) of the Mortgages Act, R.S.O. 1990, Chapter M.40, thereby extinguishing the mortgagors' right to redeem.

Background

5 By mortgage dated December 18, 1992, Harold and Angelina Raptis mortgaged the property in question to Montreal Trust to secure the sum of $165,000 for a term of one year. It was renewed for a further term ending August 1, 1994. No payments have been received by Montreal Trust under the mortgage since April 1, 1994. That default continued, and power of sale proceedings were commenced. The mortgage was not redeemed. Montreal Trust took possession of the property, and a multiple listing agreement was entered into with Sutton Group Performance Realty Inc. on July 25, 1994. The listing price was $259,900.

6 On September 17, 1994, Montreal Trust accepted an offer to purchase made by Franz Greisbach for the sum of $259,000. The closing date was set for October 31, 1994. This offer had been obtained and presented by the listing agent, Gary Coleman. In his affidavit,Coleman deposes that he was contacted by Dolores AuCoin, an agent with Lohmer Realty Inc., on September 13, 1994. She advised that she had an offer to present on the property in question. She refused to let Mr. Coleman present that offer, and requested a meeting on the next day, September 14, 1994. That meeting was attended by AuCoin, Coleman, and Deborah Jones, a Montreal Trust loans officer. Jones and Coleman deposed that AuCoin refused to show the offer unless she was guaranteed a commission. According to Jones, AuCoin stated that she would present the offer only if Montreal Trust provided her with something in writing saying that her commission would be protected in the event that the sale was not completed. Although AuCoin mentioned the amount of the offer, namely $221,000, she did not reveal the identity of the offerors. Jones deposed that AuCoin was concerned about the possibility that the second mortgagee might redeem. Finally, Jones deposed that she had authority to accept any offer to purchase the Raptis property.

7 In her affidavit of November 11, 1994, AuCoin confirms that she was concerned that the second mortgagee could redeem. She acknowledges,as well, requesting a letter guaranteeing a commission to Lohmer Real Estate, although she deposes that this occurred on September 16, 1994, and in the context of a conversation with Jeff Hartnell, the Montreal Trust branch manager, concerning Schedule "C" to be attached to the agreement of purchase and sale. At no time does AuCoin allege that she presented the offer.

8 AuCoin deposed that Gary Coleman, the listing agent, advised her on September 16, 1994, to have the deposit on the offer to purchase increased from $10,000 to $15,000. This could not be done until after 6 p.m. AuCoin deposed further that since September 16th was a Friday, Coleman had advised her that her offer would be presented on Monday, September 19, 1994.

9 AuCoin telephoned Coleman on Saturday and Sunday. On Sunday, she was told by Coleman that the property had been sold. – 76 –

10 An affidavit by Renate Pleau, a real estate agent with P.E. Olsen Ltd., was filed. It suggests, in support of AuCoin's position, that Coleman made it difficult for other agents to show the property, and, thus, to obtain offers to be presented.

11 In my opinion, none of the allegations made against Coleman establish any bad faith or breach of duty on his part. There is no doubt that AuCoin had a valid offer to purchase in her possession at the meeting of September 14, 1994, with Coleman and with a duly authorized representative of the vendor. I find as a fact that AuCoin refused to present that offer until she received from Montreal Trust a written guarantee that a commission would be paid whether or not a sale was completed following acceptance of her clients' offer. Montreal Trust declined to give such a guarantee. With this knowledge, neither Coleman nor Montreal Trust was required to wait for AuCoin to change her position before considering other offers.

12 A copy of an offer dated September 12, 1994, made by "Albert and Maria, in trust" and signed by "Alberto Alves" and "M. Alves," was filed with the Court. The amount offered was $221,000; a closing date of September 30, 1994, was contemplated. A further offer dated September 17, 1994, signed by "Albert Alves" and "M. Alves," was also filed. The amount offered was $259,900, with a deposit of $15,000. Again, the closing date was September 30, 1994. This second offer has attached to it Schedule "C," whereas, according to AuCoin, the original offer had attached to it Schedule "A."

Schedule "A" and Schedule "C"

13 Schedule "A" included the following provisions:

1. The Purchaser acknowledges that the Vendor is a mortgagee of the lands and premises contained herein, and is selling the same pursuant to the power of sale contained in its mortgage in accordance with the Mortgage Act [sic], R.S.O. 1980 c. 296.

2. The Agreement of Purchase and Sale herein is subject to the following:

(a) The rights, if any, of the mortgagor or any other person to redeem or place the vendor's mortgage in good standing prior to the closing of this transaction; and

(b) The Vendor being restrained or enjoyed from completing the herein transaction by a Court of competent jurisdiction or the filing or registration of any document preventing the vendor from giving good title to the Purchaser; and

(c) The Vendor being able to complete the sale pursuant to the power of sale contained in its mortgage;

In the event that:

(i) The mortgagor or any other person shall become entitled to redeem or place the Vendor's mortgage in good standing and does so prior to the completion of this transaction; or

(ii) The Vendor is restrained or enjoined on either an interim or permanent basis from completing the herein transaction by a court of competent jurisdiction, or is unable to complete the transaction because of the filing or registration of any document; or

(iii) The vendor is unable to complete the sale pursuant to the power of sale contained in its mortgage then the Vendor shall have the right to terminate the herein Agreement of Purchase and Sale and upon the Vendor giving written notice to the Purchaser that it is so doing, the Agreement of Purchase and Sale herein shall become null and void and the deposit shall be returned to the Purchaser without interest or deduction. Written notice aforesaid shall be deemed to be validly given if received by the agent herein or the solicitors for the Purchaser.

(Emphasis added.) – 77 –

14 Schedule "C" was different from Schedule "A" only in that the underlined provisions above were deleted and do not appear in Schedule "C."

15 In his affidavit of October 27, 1994, Hartnell states that he had insisted with the realtors that any power of sale schedule must delete reference to the mortgagors having a right to redeem. Montreal Trust wanted to ensure that when the property was sold, the sale could be completed. Dolores AuCoin reviewed Schedule "C," then telephoned Hartnell to tell him that it appeared to her that the second mortgagee could still redeem. She asked for a letter guaranteeing payment of commission.

16 On October 19, 1994, representatives of Alberto and Maria Alves attended upon Hartnell, and attempted to tender a certified cheque in the amount of $175,000 in full satisfaction of all outstanding principal and interest arrears under the mortgage, as well as all relevant costs associated with the default by the mortgagors Harold and Angelina Lina Raptis. That payment was refused, according to Hartnell, because "Harold Raptis and Angelina Raptis had lost their right to redeem the property when the agreement of purchase and sale with Mr. Greisbach was entered into."

The Law

17 Section 22(1)(a) of the Mortgages Act provides, in part, that:

22(1) Despite any agreement to the contrary, where default has occurred in making any payment of principal or interest due under a mortgage or in the observance of any covenant in a mortgage and under the terms of the mortgage, by reason of such default, the whole principal and interest secured thereby has become due and payable,

(a) at any time before sale under the mortgage; ...

. . . . . the mortgagor may perform such covenant or pay the amount due under the mortgage, exclusive of the money not payable by reason merely of lapse of time, and pay any expenses necessarily incurred by the mortgagee, and thereupon the mortgagor is relieved from the consequences of such default.

18 The Ontario Court of Appeal, in Theodore Daniels Ltd. v. Income Trust Co. (1982), 37 O.R. (2d) 316, at p. 319, held that "sale" in s. 21(1)(a) [now s. 22(1)(a)] means "acceptance of an offer." It cited with approval the decision by Lieff J. in Mission Construction Ltd. v. Seel Investments Ltd., [1973] 2 O.R. 190. At page 191, Lieff J. stated that:

Section 21(1)(a) [now 22(1)(a)] provides that a mortgagor may put a mortgage in good standing "at any time before sale under the mortgage". The acceptance of an offer to purchase constitutes a "sale", so that the applicant lost its rights under this section on February 28, 1973. It was argued, however, that this right has remained in existence to the present date due to the following clause in the offer to purchase:

Acceptance by the Vendor hereof shall be subject to the rights if any of the registered owner of the property to redemption or to put the Vendor's mortgage in good standing.

I cannot accept this argument. The right of the applicant under s. 21(1)(a) to put the mortgage in good standing ended on the acceptance of the offer to purchase. The "rights if any" referred to in the above clause include only those rights whose existence was not terminated by the acceptance of the offer, such as the right to redemption upon proof that the sale was fraudulent or improper.

19 In the case at bar, there is no proof that the sale was fraudulent or improper. The vendor, Montreal Trust, took the precaution of deleting from the offer to purchase the clause considered by Lieff J. in the Mission Construction case. Montreal Trust evinced an intention to preclude redemption after an offer to purchase had been accepted. – 78 –

20 Mr. Paquette, for the respondents Alves, advanced two further arguments. First, he submitted, based on a statement in 618469 Ontario Ltd. v. Szanto (1990), 16 R.P.R. (2d) 100, that the proposition in the Mission Construction case is qualified. In Szanto, Steele J. states at page 102 that "[t]here may be exceptional circumstances which may justify a departure from this strict rule." Steele J. found that such special circumstances existed in that case because the mortgagor had advised the mortgagee many times of his intention to redeem, and of his efforts to arrange financing. In addition, the mortgagor had expended about $35,000 for surveys, and $37,000 in appraisal fees in relation to a mortgage commitment letter relating to the raising of funds to pay off the mortgage. I find that no special circumstances exist in the case at bar sufficient to justify a departure from the proposition in the Mission Construction case.

21 The second argument advanced was that Schedule "C" contemplates redemption prior to closing of a sale. It was pointed out that clause 2(b) makes the agreement of purchase and sale subject to "the filing or registration of any document preventing the vendor from giving good title to the purchaser." The material before the Court demonstrates that Montreal Trust intends to complete the sale to Greisbach if permitted to do so, and that Greisbach is anxious to close. Inasmuch as the quoted words from clause 2(b) are relied upon to establish the intention of the parties to the agreement of purchase and sale that redemption prior to sale will prevent the closing, they cannot overcome the clear inference to the contrary resulting from the deletion of clauses 2(a) and 2(i). Moreover, as held in the Mission Construction case, the right of the mortgagors to put the mortgage in good standing ended on the acceptance of Greisbach's offer to purchase. The tender of the monies owing to Montreal Trust on October 19, 1994, and the registration of the deed from Raptis to Alves on the same date, were ineffectual. The grantees under that deed can have no greater rights than the grantors.

Result

22 The application by Montreal Trust Company of Canada is granted, and the cross-application by Alberto Alves and Maria Alves is dismissed.

23 There will be a declaration that the sale by Harold Raptis and Angelina Lina Raptis to Alberto Alves and Maria Alves is null and void, and an order that the deed registered on October 19, 1994, as Instrument Number 349186 for the Registry Division of Perth (Stratford), be removed from title.

24 The applicant Montreal Trust is entitled to sell and complete the sale of the lands in question pursuant to the agreement of purchase and sale between Montreal Trust and Franz Greisbach dated September 17, 1994.

25 If the matter of costs of these applications cannot be agreed upon, counsel may write to me.

Order accordingly.

END OF DOCUMENT

Copr. (c) West 2008 No Claim to Orig. Govt. Works

1973 CarswellOnt 414

[1973] 2 O.R. 190, 33 D.L.R. (3d) 286 – 79 –

Mission Construction Ltd. v. Seel Investments Ltd.

Re Mission Construction Ltd. and Seel Investments Ltd.

Ontario High Court of Justice

Lieff, J.

Judgment: March 23, 1973 Counsel: H. M. Lewin, for applicant. E. L. Marrus, Q.C., and E. J. Kirsh, for respondent.

Subject: Corporate and Commercial

Mortgages --- Sale — Practice and procedure — Stay of proceedings.

Sale of land under power of sale — Mortgagor attempting to put mortgage in good standing — Acceptance of offer constituting a sale — Mortgages Act, R.S.O. 1970, c. 279, s. 21(1)(a).

A mortgagee in exercising its power of sale, entered into an agreement of sale of the mortgaged premises. A clause in the agreement stated "Acceptance by the vendor hereof shall be subject to the rights if any of the registered owner of the property to redemption or to put the Vendor's mortgage in good standing". The mortgagor seeking to stay the sale, argued that its right to put the mortgage in good standing remained after the acceptance of the offer to purchase because of the existence of the clause in the agreement of sale. Held, the application should be dismissed. The "rights if any" referred to in the clause included only those rights whose existence was not terminated by the acceptance of the offer, such as the right to redemption upon proof that the sale was fraudulent or improper.

Lieff, J.:

1 This is an application under s. 21(1)(a) of the Mortgages Act, R.S.O. 1970, c. 279, for an order staying the sale of mortgaged property under power of sale by the respondent second mortgagee, and permitting the applicant mortgagor to pay the amounts due under the mortgage and put it in good standing. A separate application for an injunction restraining the completion of said sale was not proceeded with.

2 Counsel for the applicant informed the Court at the outset that the Canadian Bank of Commerce, the third mortgagee, would not appear. On consent, an application to amend the proceedings so as to have them brought under Rules 611 and 612 was allowed. It was agreed by counsel that the second mortgage was in default at all relevant times, that an offer to purchase the mortgaged property was accepted by the respondent on February 28, 1973, that the sale proceedings till that date were regular, that there was no collusion between the respondent and the purchaser, and that the terms of the sale were such as not to make it an improvident sale. The purchase price will be sufficient to pay off in full the first and second mortgagees, and pay off half the amount owing to the third mortgagee.

3 Section 21(1)(a) provides that a mortgagor may put a mortgage in good standing "at any time before sale under the mortgage". The acceptance of an offer to purchase constitutes a "sale", so that the applicant lost its rights under this section on February 28, 1973. It was argued, however, that this right has remained in existence to the present date due to the following clause in the offer to purchase:

Acceptance by the Vendor hereof shall be subject to the rights if any of the registered owner of the property to redemption or to put the Vendor's mortgage in good standing.

4 I cannot accept this argument. The right of the applicant under s. 21(1)(a) to put the mortgage in good standing ended on the acceptance of the offer to purchase. The "rights if any" – 80 – referred to in the above clause include only those rights whose existence was not terminated by the acceptance of the offer, such as the right to redemption upon proof that the sale was fraudulent or improper. The application will therefore be dismissed with costs, payable on a solicitor and his own client basis to the respondent.

5 Because this application was turned into one for the interpretation of the agreement for sale of the lands in question, the purchaser was of necessity properly before the Court and, in view of the result, the purchaser should also have its costs of the motion, to be taxed as between party and party.

6 In reaching this decision, I have considered the following cases: Smith v. Barff (1912), 27 O.L.R. 276, 8 D.L.R. 996 (C.A.); Standard Realty Co. v. Nicholson (1911), 24 O.L.R. 46 (K.B.); Dovercourt Land Building & Savings Co. v. Dunvegan Heights Land Co. (1920), 47 O.L.R. 105 (H.C.); Todd v. Linklater (1901), 1 O.L.R. 103 (C.A.); Gentles v. Canada Permanent & Western Canada Mortgage Corp. (1900), 32 O.R. 428 (Q.B.); Arnold v. Bronstein, [1971] 1 O.R. 467, 15 D.L.R. (3d) 649; Lord Waring v. London & Manchester Ass'ce Co., Ltd., [1935] 1 Ch. 310; Warner v. Jacob (1882), 20 Ch. D. 220; Haddington Island Quarry Co. Ltd. v. Hudson, [1911] A.C. 722. – 81 –

2002 CarswellOnt 850

211 D.L.R. (4th) 1, 157 O.A.C. 135, 58 O.R. (3d) 481, 50 R.P.R. (3d) 1

Amberwood Investments Ltd. v. Durham Condominium Corp. No. 123

Ontario Court of Appeal

Charron, MacPherson, Cronk JJ.A.

Heard: October 18, 19, 2001 Judgment: March 20, 2002[FN*] Docket: CA C35155

Proceedings: affirming (2000), 2000 CarswellOnt 3258, 191 D.L.R. (4th) 210 (Ont. S.C.J.)

Counsel: Patricia M. Conway, for Appellant Alan S. Price, Peter A. Simm, for Respondents

Subject: Property

Real property --- Restrictive covenants — Enforcement — Running with land — General

Original owners of adjoining parcels of land on which one owner was building two condominiums entered into reciprocal agreement for sharing of expenses and responsibilities for mutual services, realty taxes and easements, for existing and contemplated phases of development — A Ltd. became owner of second phase lands — A Ltd. refused to pay interim expenses pursuant to reciprocal agreement on basis that positive covenant did not run with land — DCC, current owner of other parcel of land, registered lien against A Ltd.'s lands and issued notice of sale — A Ltd.'s application for declaration it was not bound to pay interim expenses was granted on ground that no exception had been established in caselaw to general rule that positive covenants do not run with land — DCC appealed — Appeal dismissed — Positive covenants do not run with land so A Ltd. could only be liable if it came within exception to rule — Adoption of doctrine of benefit and burden exception would have uncertain ramifications and could not be adequately addressed on case by case basis — Exception of conditional grant of easement was also not applicable since there was no link between easements conferred under reciprocal agreement and positive convenant to pay expenses, so as to create conditional grant of easement.

Real property --- Restrictive covenants — Enforcement — Subsequent purchasers — Essential conditions

Original owners of adjoining parcels of land on which one owner was building two condominiums entered into reciprocal agreement for sharing of expenses and responsibilities for mutual services, realty taxes and easements, for existing and contemplated phases of development — A Ltd. became owner of second phase lands — A Ltd. refused to pay interim expenses pursuant to reciprocal agreement on basis that positive covenant did not run with land — DCC, current owner of other parcel of land, registered lien against A Ltd.'s lands and issued notice of sale — A Ltd.'s application for declaration it was not bound to pay interim expenses was granted on ground that no exception had been established in caselaw to general rule that positive covenants do not run with land — DCC appealed — Appeal dismissed — Positive covenants do not run with land so A Ltd. could only be liable if it came within exception to rule — Adoption of doctrine of benefit and burden exception would have uncertain ramifications and could not be adequately addressed on case by case basis — Exception of conditional grant of easement was also not applicable since there was no link between easements conferred under reciprocal agreement and positive convenant to pay expenses, so as to create conditional grant of easement.

Easements --- Miscellaneous issues

Original owners of adjoining parcels of land on which one owner was building two condominiums entered into reciprocal agreement for sharing of expenses and responsibilities for mutual services, realty taxes and easements, for existing and contemplated phases of development — A Ltd. became owner of second phase lands — A Ltd. refused to pay interim expenses pursuant to reciprocal agreement on basis that positive covenant did not run with – 82 – land — DCC, current owner of other parcel of land, registered lien against A Ltd.'s lands and issued notice of sale — A Ltd.'s application for declaration it was not bound to pay interim expenses was granted on ground that no exception had been established in caselaw to general rule that positive covenants do not run with land — DCC appealed — Appeal dismissed — Positive covenants do not run with land so A Ltd. could only be liable if it came within exception to rule — Adoption of doctrine of benefit and burden exception would have uncertain ramifications and could not be adequately addressed on case by case basis — Exception of conditional grant of easement was also not applicable since there was no link between easements conferred under reciprocal agreement and positive convenant to pay expenses, so as to create conditional grant of easement.

Parties were the current registered owners of adjoining parcels of land on which the original owner of one parcel intended to build two condominium residential buildings. The original owners entered into a reciprocal agreement which was registered on title to both properties. The agreement gave easements to each owner over the land of the other for the purpose of support and access and provided for the sharing of the cost of maintaining certain services such as air conditioner maintenance and water treatment. The agreement also provided that it was to run with the land benefited and burdened by it.

When the respondent, A Ltd., became owner of one parcel, it refused to continue to pay the expenses as per the agreement. The other current owner, DCC, registered a caution and issued a notice of sale proceedings in accordance with the agreement. A Ltd. then applied for an order setting aside the caution and the applications judge granted the application and declared that A Ltd. was not bound to pay the expenses.

The applications judge held that the covenant to pay the expenses fell within the definition of a positive covenant and that it was settled law that obligations of this kind did not run with the land either at law or in equity, despite the contracting parties' express intention to the contrary. The applications judge further held that the benefit and burden doctrine and the conditional grant of easement, which were exceptions to the rule and had been clearly adopted in English law, could not apply in this case absent legislative reform or endorsement of them by an appellate court.

DCC appealed on the ground the applications judge had erred in finding he was precluded by the doctrine of stare decisis from adopting the applicable English law.

Held: The appeal was dismissed.

Per Charron J.A. (Cronk J.A. concurring): The rule that positive covenants do not run with the land has been a settled principle of English common law for over a century and is the law in Canada. The rule sometimes causes inconvenience but any reform must come from the legislature and not the courts. Accordingly, A Ltd. was not bound by the positive covenant to pay the expenses. Nor was it liable to pay as a result of the application of the doctrine of benefit and burden. The adoption of this exception to the rule, much the same as the abolition of the rule itself, would have complex and uncertain ramifications that could not be adequately addressed on a case by case basis.

As for the conditional grant of easement exception, there was no link between the easements conferred under the reciprocal agreement and the positive covenant to pay expenses, so as to create a conditional grant within the meaning of this principle.

Per MacPherson J.A. (dissenting): The original historical rationale for the rule that positive convenants do not run with the land is simply not as relevant in Ontario in 2002 as it may have been in England in 1885. Also, the rule is simply too harsh if it is applied in all cases. Accordingly, it is appropriate for the court to address the issue of the exceptions to the rule. Since A Ltd. had clear notice of the burdens, which it was required to assume when it signed the reciprocal agreement and since it derived real and substantial benefits from the agreement and elected to accept them, it must also accept the burden of paying its share of the expenses. Accordingly, the benefit burden exception was applicable. Furthermore, the doctrine of conditional grant of easement also applied since it was clear from a reading of the entire agreement that there was a direct and intentional linkage between the benefits of the easement and the burden of the expenses.

Annotation

The Amberwood decision is a fascinating case which deals with the ability to enforce positive covenants relating to real property against successors in title who did not otherwise contractually agree to be bound by such covenants. The case was a landmark opportunity for the Ontario Court of Appeal to revisit the Canadian application of the rule in Austerberry v. Oldham (1885), 29 Ch.D. 750 (Eng.C.A.), the leading English case rejecting the proposition that positive covenants can run with the land (readers are reminded that negative covenants were found by the English Chancery Division to run with the land, but only in equity, in the seminal decision of Tulk v. Moxhay (1848), 41 E.R. 1143, 2 Ph. 774, [1843-1860] All E.R. Rep. 9). In Amberwood, Madam Justice Charron, of the Ontario Court of Appeal, with Madam Justice Cronk concurring and Mr. Justice MacPherson dissenting, upheld the rule in Austerberry, concluding that any attempt at overturning the age-old common law proscription against positive – 83 – covenants running with the land was more appropriately a subject matter for statutory reform than an area of law properly amended by judicial activism.

This annotator proffers no particular opinion on the court's interpretation of its own jurisdiction. On the one hand, it was originally the nineteenth century English courts, not the English Parliament of the day, that first formulated the rules in Tulk v. Moxhay and Austerberry, and the adoption in Canada of the English common law of restrictive covenants is entirely jurisprudential in nature, not legislative (see Parkinson v. Reid [1966] S.C.R. 162, 56 O.L.R. (2d) 315). Accordingly, it seems peculiar that the Ontario Court of Appeal, nearly one hundred and fifty years after Tulk v. Moxhay, took the view that this was an area of property law that is beyond the mandate of the courts to amend. One might have thought, as did Mr. Justice MacPherson in his vigorous and quite contrarian dissent, that if the courts could proscribe that positive covenants run with the land in the first place, then it would be entirely rational to find it intra vires for the courts to curtail the proscription by later introducing exceptions and limitations.

On the other hand, Ontario, and a number of other jurisdictions as well, has recently engaged in exhaustive overviews of the entire law regarding freehold covenants (see, e.g., 1989 Ontario Law Report Commission, Report on Covenants Affecting Freehold Land (the "OLRC Report") and the Law Commission of the United Kingdom, Transfer of Land: The Law of Positive and Restrictive Covenants (1984) (the "U.K. Report")). The Ontario Parliament, even when faced with a law reform report of its own commission, and brimming with detailed recommendations for statutory reform of the law of freehold covenants, chose not to act upon the recommendations. Against this backdrop, it seems clearly inappropriate for the courts to reform an area of the law which has withstood nearly one hundred and fifty years of usage, and which, more importantly, the law makers having jurisdiction have explicitly considered and declined to reform.

Whether or not, as a normative matter, positive covenants (typically, but not always, covenants to pay monetary contributions to joint infrastructure maintenance costs, as was the case in the agreement in dispute in Amberwood) should or should not be binding on successors in title, given appropriate notice, is, in and of itself, a complicated policy question. Into that particular fray, this annotator is not prepared to dive. The Amberwood decision itself (including Mr. Justice MacPherson's strong dissenting reasons therein), the excellent case commentaries thereon by Paul Perell and Peter Simms at pages 52 and 63 in this volume of Real Property Reports, the OLRC Report, the U.K. Report, and the typically insightful commentaries of Professor Bruce Ziff in "Positive Covenants Running with Land: A Castaway on Ocean Island?" (1989), 27 Alta. L.R. 354 and "Restrictive Covenants: The Basic Ingredients", Special Lectures 2002: Real Property Law, The Law Society of Upper Canada, April 18, 2002 Tab 9 at 9-25ff, (Note: the Special Lectures 2002, are being published by The Law Society of Upper Canada and the final published version of Professor Ziff's article may differ from the paper as delivered and cited herein), collectively form an exhaustive consideration of all of the policy issues relevant to the Canadian law on positive freehold covenants.

This annotator will, however, venture a gratuitous editorial comment on the majority's seemingly dim view of the "conditional grant doctrine." Paraphrasing greatly, Madam Justice Charron refused to give any credence to the "conditional grant" doctrine as a truly independent exception to Austerberry, instead subsuming the doctrine of "conditional grant" into the bigger question of whether or not the "benefit and burden" doctrine adopted in Halsall v. Brizell [1957] 1 All E.R. 371, was recognizable under Ontario law. In her own words:

In my view, the applications judge's observation that the "conditional grant" exception is essentially a form of the "benefit/burden doctrine" accurately describes the position taken by DCC 123 in this case and, in turn, leads me to the conclusion that this second argument must fail, essentially for the same reasons that I have rejected [the benefit and burden doctrine]. Hence, as a matter of construction of the creating instrument itself, if a grant of benefit or easement is framed as conditional upon the continuing performance of a positive obligation, the positive obligation may well be enforceable, not because it would run with the land, but because the condition would serve to limit the scope of the grant itself. It is undisputed in English and Canadian law that the rule that positive covenants do not run with the land governs despite any express intention to the contrary contained in the agreement. Indeed, if the applications judge was correct in his conclusion that section 13.1(b) [an expression of mutual intent] effectively created an exception to the rule, it would be open to anyone to simply abolish the rule at the stroke of a pen. All that would be required would be a general statement of intent that the continuing right to the use and enjoyment of all the benefits in an agreement was conditional upon the acceptance of the burden contained in any of the covenants. The recognition of such a wide exception would constitute a profound change in the law.

This annotator has often considered the concept of "conditional grant" to be a form of legal sophistry, designed essentially to achieve indirectly what obviously cannot be accomplished directly. Consistent with Madam Justice Charron's reasons, this annotator finds it an altogether more satisfactory approach to deal with the issue head on: either a positive covenant can run with the land and can be enforced against successors in title or it cannot. It seems perverse to suggest that positive covenants cannot otherwise run with the land, either at law or in equity, but can nonetheless give rise to a right of re-entry for default against downstream owners without privity simply because the granting language itself is worded so as to be a perpetual limitation on the grant. Madam Justice Charron, as if for – 84 – absolute certainty, goes on to hold, on the facts, that the granting language in the reciprocal easement and cost sharing agreement in Amberwood did not, in any event, qualify as a "conditional grant".

The adoption of the "conditional grant" theory as a viable exception to a proscription on running positive covenants would also have led to a number of other complications. Would, for instance, the wording in the reciprocal easement and cost sharing agreement in Amberwood have created a true conditional grant, or merely a grant with conditions subsequent? Although this annotator professes to an imperfect understanding of the theory of defeasible estates in fee simple generally, it would appear that, if the positive covenant forms the limitation of a true conditional grant, then it might very well be void for repugnancy, as the common law abhors such attempts to create circumscribed fee simples (see, generally, Malcolm, Re, [1947] O.W.N. 871 (Ont. H.C.)). The situation is not that much improved by characterizing a positive covenant as part of a grant with conditions subsequent, instead of as a true conditional grant. There may be a Perpetuities Act risk incumbent upon interpreting Amberwood as a grant with conditions subsequent (see e.g. McKellar, Re, [1972] 3 O.R. 16 (H.C.), affirmed [1973] 3 O.R. 178 (C.A.) and Brian Bucknall's excellent commentary on the nature of defeasible fee simple estates, "The Right to Retake Property", Options and Rights of First Refusal in Real Estate Transactions, June 26, 2000, Canadian Bar Association — Ontario). Curiously enough, this is exactly how Professor Ziff characterizes a positive covenant: a "grant of a fee simple estate subject to a condition subsequent, which is made subject to the right of re-entry if the condition is broken," supra, Special Lectures 2002 at p. 9-30.

All may not be entirely lost for the real estate development bar. According to the ever insightful Professor Ziff in Special Lectures 2002, supra, at 9-28ff, the rentcharge (an archaic incorporeal hereditament in the nature of an annexed periodic payment requirement, that is like rent, but is not dependent on a reversion) is arguably also available under Canadian law, and could serve to make downstream owners liable for the charge without privity of contract. Although Professor Ziff concedes that "the rentcharge is a rare bird in Canada" (to which this annotator would add, "the rentcharge is also a strange bird in Canada"), he is probably correct in asserting its availability under Canadian law (see, generally, A.H. Oosterhoff and W.B. Rayner, Anger and Honsberger Law of Real Property, (1985), Canada Law Book, §. 1802 — but note that none of the cases cited in Anger & Honsberger as authority for the rentcharge under Canadian law are actually Canadian), and that the rentcharge might be a viable proxy for a positive covenant that can run with the land, (rentcharge was expressly referred to with approval in Austerberry as an enforceable alternative to the impugned positive covenant).

There are, of course, some weaknesses in using the rentcharge, even if we concede its availability, as a proxy for running positive covenants. First of all, it seems to work only for monetary covenants, and might not work for positive covenants that require observance or performance and which would not otherwise be convincingly compensable by the payment of money. Secondly, this annotator is especially uncertain about the enforceability of rentcharges coupled with a right of re-entry. Rentcharges may give rise to an action on the covenant and distress for failure to pay the rentcharge, but do not necessarily entitle the beneficiary thereof to forfeiture of, or re-entry upon, the servient fee upon default. Professor Ziff refers to the English technique of coupling a rentcharge with a right of re- entry but wisely concludes that "even though English statutory reforms seem to endorse the validity of this contrivance, it has apparently never been subjected to serious judicial scrutiny". Query also how a rentcharge with right of re-entry can possibly comply with the Perpetuities Act (albeit maybe "wait and see", this annotator can easily envisage eventual non-compliance).

There is no doubt that the decision in Amberwood leaves the real property development bar woefully unsatisfied. In almost any multiple-use development of any size whatsoever, there are increasing incidences of reciprocal cost sharing agreements allocating responsibility for joint infrastructure works necessary for the success of the project. A finding by the Ontario Court of Appeal to the effect that a covenant to pay a proportionate share of ongoing infrastructure maintenance costs runs with the land, and can be enforced against downstream owners, would have been a great practical relief for the bar. As is, practitioners are left with the awkward "cascading contractual privity" or "chain of covenants" approach to drafting, requiring successors in title to assume expressly the covenant, and to covenant to obtain further assumption covenants from their respective downstream successors, and so on. Perhaps even more disappointing for the real estate development bar, however, is the fact that Amberwood is not being appealed to the Supreme Court and the matter will not likely achieve any degree of legislative priority for some time to come.

Jeffrey W. Lem [FN1]

Cases considered by Charron J.A.:

Austerberry v. Oldham (1885), 29 Ch. D. 750 (Eng. C.A.) — considered

E.R. Ives Investment Ltd. v. High (1966), [1967] 2 Q.B. 379, [1967] 1 All E.R. 504 (Eng. C.A.) — referred to – 85 –

Ellenborough Park, Re (1955), [1956] 1 Ch. 131, [1955] 3 All E.R. 667 (Eng. Ch. Div.) — referred to

Elliston v. Reacher, [1908] 2 Ch. 665, [1908-10] All E.R. Rep. 612, 99 L.T. 701 (Eng. C.A.) — referred to

Friedmann Equity Developments Inc. v. Final Note Ltd., 2000 SCC 34, 2000 CarswellOnt 2458, 2000 CarswellOnt 2459, 48 O.R. (3d) 800 (headnote only), 188 D.L.R. (4th) 269, 34 R.P.R. (3d) 159, 255 N.R. 80, [2000] 1 S.C.R. 842, 7 B.L.R. (3d) 153, 134 O.A.C. 280, [2000] S.C.J. No. 37 (S.C.C.) — considered

Halsall v. Brizell (1956), [1957] 1 All E.R. 371, [1957] Ch. 169, [1957] 2 W.L.R. 123, 101 Sol. Jo. 88 (Eng. Ch. Div.) — considered

Haywood v. Brunswick Permanent Benefit Building Society (1881), 8 Q.B.D. 403 (Eng. Q.B.) — considered

Keppell v. Bailey (1834), 39 E.R. 1042, 2 My. & K. 517 (Eng. Ch. Div.) — considered

Parkinson v. Reid, [1966] S.C.R. 162, 56 D.L.R. (2d) 315, 1966 CarswellOnt 58 (S.C.C.) — considered

R. v. York (Township), [1960] O.R. 238, 23 D.L.R. (2d) 465 (Ont. C.A.) — considered

Rhone v. Stephens, [1994] 2 All E.R. 65 (U.K. H.L.) — followed

Spencer's Case (1583), 77 E.R. 72, 5 Co. Rep. 16a, [1558-1774] All E.R. Rep. 68 (Eng. Q.B.) — considered

Thamesmead Town Ltd. v. Allotey, [1998] 37 E.G. 161, [1998] EWCA Civ 15 (Eng. C.A.) — considered

Tito v. Waddell, [1977] Ch. 106, [1977] 3 All E.R. 129 (Eng. Ch. Div.) — considered

Tulk v. Moxhay (1848), 41 E.R. 1143, 2 Ph. 774, [1843-1860] All E.R. Rep. 9 (Eng. Ch. Div.) — considered

Cases considered by MacPherson J.A. (dissenting):

Austerberry v. Oldham (1885), 29 Ch. D. 750 (Eng. C.A.) — considered

E.R. Ives Investment Ltd. v. High (1966), [1967] 2 Q.B. 379, [1967] 1 All E.R. 504 (Eng. C.A.) — followed

Friedmann Equity Developments Inc. v. Final Note Ltd., 2000 SCC 34, 2000 CarswellOnt 2458, 2000 CarswellOnt 2459, 48 O.R. (3d) 800 (headnote only), 188 D.L.R. (4th) 269, 34 R.P.R. (3d) 159, 255 N.R. 80, [2000] 1 S.C.R. 842, 7 B.L.R. (3d) 153, 134 O.A.C. 280, [2000] S.C.J. No. 37 (S.C.C.) — considered

Government Insurance Office v. K.A. Reed Services Pty. Ltd., [1988] V.R. 829 (Australia Full Ct.) — not followed

Halsall v. Brizell (1956), [1957] 1 All E.R. 371, [1957] Ch. 169, [1957] 2 W.L.R. 123, 101 Sol. Jo. 88 (Eng. Ch. Div.) — followed

Parkinson v. Reid, [1966] S.C.R. 162, 56 D.L.R. (2d) 315, 1966 CarswellOnt 58 (S.C.C.) — considered

Rhone v. Stephens, [1994] 2 All E.R. 65 (U.K. H.L.) — not followed

Tito v. Waddell, [1977] Ch. 106, [1977] 3 All E.R. 129 (Eng. Ch. Div.) — followed

Statutes considered by Charron J.A.:

Agricultural Research Institute of Ontario Act, R.S.O. 1990, c. A.13 s. 3(f)(i) — referred to s. 4.1 [en. 1994, c. 27, s. 5(7)] — referred to s. 4.2 [en. 1994, c. 27, s. 5(7)] — referred to

Building Code Act, 1992, S.O. 1992, c. 23 s. 8(3)(c)(iv) — referred to s. 8(5) — referred to – 86 –

Condominium Act, 1998, S.O. 1998, c. 19 Generally — considered

Conservation Land Act, R.S.O. 1990, c. C.28 s. 3(2)-3(10) — referred to

Conveyancing and Law of Property Act, R.S.O. 1980, c. 90 Generally — referred to

Drainage Act, R.S.O. 1990, c. D.17 s. 2(1)-2(4) — referred to

Forestry Act, R.S.O. 1990, c. F.26 s. 2(1) — referred to s. 3 — referred to

Industrial and Mining Lands Compensation Act, R.S.O. 1990, c. I.5 ss. 1-4 — referred to

Land Titles Act, R.S.O. 1980, c. 230 Generally — referred to

Niagara Escarpment Planning and Development Act, R.S.O. 1990, c. N.2 s. 24(2.1) [en. 2000, c. 26, Sched. L, s. 7(10)] — referred to s. 27(1) — referred to s. 27(7) — referred to

Ontario Heritage Act, R.S.O. 1990, c. O.18 s. 22 — referred to s. 37 — referred to

Perpetuities Act, R.S.O. 1980, c. 374 Generally — referred to

Planning Act, R.S.O. 1990, c. P.13 Generally — considered s. 28(10)-28(11) — referred to s. 37(3)-37(4) — referred to s. 41(7)(c) — referred to s. 41(8) — referred to s. 41(10) — referred to s. 51(16) — referred to s. 51(25)-51(27) [en. 1994, c. 23, s. 30] — referred to s. 70.2(2) [en. 1994, c. 23, s. 46] — referred to s. 70.2(5) [en. 1994, c. 23, s. 46] — referred to

Public Lands Act, R.S.O. 1990, c. P.43 s. 46(2)-46(3) — referred to

Registry Act, R.S.O. 1980, c. 445 Generally — referred to – 87 –

Surveys Act, R.S.O. 1990, c. S.30 s. 61(1) — referred to s. 61(4) — referred to

Rules considered by Charron J.A.:

Rules of Civil Procedure, R.R.O. 1990, Reg. 194 R. 14.05 — pursuant to

APPEAL by owner of land from declaration of applications judge, reported at 2000 CarswellOnt 3258, 191 D.L.R. (4th) 210, 50 O.R. (3d) 670, 37 R.P.R. (3d) 144 (Ont. S.C.J.), that owner of adjoining lands was not bound by provision of reciprocal agreement signed by parties' predecessors in title.

Charron J.A.:

1 The sole issue on this appeal is whether a covenant to pay certain interim expenses contained in a reciprocal easement and cost sharing agreement (the "Reciprocal Agreement") between owners of adjoining parcels of land is enforceable against the successor in title to the covenantor. Stinson J. ruled that the covenant, being a positive covenant, does not run with the land and that, consequently, it was not enforceable against the respondents, Amberwood Investments Limited and 1018898 Ontario Inc. ("Amberwood"), as successors in title to the original covenantor. The appellant, Durham Condominium Corporation No. 123 ("DCC 123"), who is the original covenantee under the Reciprocal Agreement, appeals from this decision.

A. THE FACTS

2 Amberwood and DCC 123 are the registered owners of adjoining parcels of land in Whitby, Ontario. Originally, these two parcels were one, owned by a developer called WHDC Harbour Development Corporation ("WHDC").

3 WHDC intended to build two condominium high-rise residential buildings on the land, in two phases. The first phase, Phase 1, was completed and as a result, DCC 123 was registered on March 20, 1992. This registration divided the land into two parcels. WHDC started to build the Phase 2 condominium but, after putting in its foundation, ran into financial difficulties.

4 It was WHDC's intention that the two-phased project would share certain facilities and expenses, and that each Phase would have easements over the land of the other for the purposes of support and access. Particulars of these various rights and obligations were set out in the Reciprocal Agreement between WHDC and DCC 123, dated March 20, 1992, which applied to and was registered on the title of both parcels.

5 The original lender for the project was the Royal Bank of Canada ("RBC"). It advanced $50,000,000 in debenture financing to WHDC in May 1990, secured by a mortgage over both parcels of land. After DCC 123 was registered in 1992, RBC's mortgage on DCC 123's parcel was discharged. RBC retained the mortgage on the adjoining parcel. In 1995, RBC assigned this mortgage to Paarl Construction Inc. ("Paarl"), which later sold the second parcel under power of sale to The Shores of Whitby Land Corporation. This purchase was financed by Amberwood and secured by a first mortgage.

6 In October 1998, The Shores of Whitby Land Corporation defaulted under the mortgage held by Amberwood and, in consequence, quitclaimed its interest in the second parcel to Amberwood. DCC 123 was informed of this transfer the following month. As of the date of this application, no building had been constructed on the Phase 2 lands.

7 The developer's plan was for both condominiums to share a recreational facility. That facility has been constructed and is located within DCC 123, and is owned by DCC 123 and Amberwood.

8 The Reciprocal Agreement provides, amongst other things, for the sharing of the cost of maintaining certain shared services and facilities, including the recreational facility. It required WHDC to pay certain interim expenses until the second condominium was built and registered. These interim expenses are the subject-matter of this application. They are outlined in section 2.9:

Section 2.9 - Interim Costs – 88 –

The parties agree that until completion of the building comprising Condominium 2, Phase I Condominium Corporation's [DCC 123's] share of certain operating expenses contained in its budget will be greater than they will be after completion of the building comprising Condominium 2. Accordingly, the owner [WHDC] agrees until the date of registration of Condominium 2, to pay the Proportionate Share of the Phase II Condominium Corporation for the following items listed in the budget of the Phase I Condominium Corporation:

(a) Water Treatment; and

(b) Air Conditioner Maintenance.

The Owner further agrees, until the Transfer Date, to pay 35.417% of the costs of maintaining one full time security guard on the site.

9 The Reciprocal Agreement further contains general provisions that include the following:

Section 13.1 - Provisions Run with the Land

. . .

(b) The parties hereto hereby acknowledge and agree that the Easements, rights and provisions as set forth in this Agreement establish a basis for mutual and reciprocal use and enjoyment of such Easements, rights and provisions and as an integral and material consideration for the continuing right to such use and enjoyment each party hereto does hereby accept, agree to assume the burden of, and to be bound by each and every of the covenants entered into by them in this Agreement.

(c) The provisions of this Agreement are intended to run with the real property benefitted and burdened thereby, specifically, the Phase 1 Lands, the Phase 2 Lands and the Common Units and except as may otherwise be specifically provided shall bind and enure to the benefit of the respective successors in title thereof.

10 After WHDC ran into financial difficulty, it stopped paying its proportionate share of the interim expenses. Arrears accumulated. Paarl, as assignee of the RBC mortgage, refused to make the payments and DCC 123 registered a lien against the Phase 2 lands. When The Shores of Whitby Land Corporation purchased the lands, the arrears were paid. However, when Amberwood assumed ownership of the lands through the quitclaim deed, it paid the interim expenses for a few months and then refused to continue the payments. Amberwood's share of the expenses is estimated at $4,225 a month, or $50,700 a year. When the expenses remained unpaid by October 1999, DCC 123 registered a caution and issued notice of sale proceedings in accordance with the Reciprocal Agreement.

B. THE DECISION UNDER APPEAL

11 Amberwood ultimately brought this application pursuant to Rule 14.05 of the Rules of Civil Procedure seeking an order setting aside the caution registered by DCC 123 and a declaration that it was not bound by any of the terms of the Reciprocal Agreement. However, it was conceded at the hearing before Stinson J. and on this appeal that Amberwood, as subsequent owner of the Phase 2 lands who acquired title after the Reciprocal Agreement was registered, was bound by the negative covenants and the easements contained in the Reciprocal Agreement and was entitled to the benefit of the easements over the DCC 123's Phase 1 lands. It was also common ground between the parties that the original parties to the Reciprocal Agreement intended that all covenants should run with the land, including the interim expenses provision. The sole question on the application was whether the covenant to pay interim expenses should be treated differently, regardless of the original parties' intention.

12 The applications judge held that the covenant to pay interim expenses is an affirmative obligation that falls within the definition of a positive covenant. Neither party takes issue with this finding. He also held that it was settled law that obligations of this kind do not run with the land either at law or in equity, despite the contracting parties' express intentions to the contrary. Hence, a successor in title to the original covenantor is not bound by the terms of any positive covenants contained in the original agreement to which he was not a party.

13 The applications judge noted the well-recognized difficulties that may arise from a rigid application of this rule and the recommendations for reform made by the Ontario Law Reform Commission ("OLRC") in its 1989 Report on Covenants Affecting Freehold Land (the "1989 Report"). The applications judge referred to the methods that have been developed over time in England to avoid or circumvent the application of this potentially problematic rule.

14 It was DCC 123's contention that two of those methods or exceptions to the rule that positive covenants do not run with the land were applicable to this case: first, the benefit and burden doctrine from Halsall v. Brizell (1956), [1957] 1 All E.R. 371 (Eng. Ch. Div.); and second, the conditional grant of easement. It was argued, with respect to – 89 – the first "exception", that a person who claims the benefit of a deed must also take it subject to its burdens. It was further argued, with respect to the second "exception", that where the grant of a benefit or easement in a conveyance of land is conditional on assuming a positive obligation, the obligation is binding on the person who takes the grant. It was DCC 123's position that, on the facts of this case, Amberwood was bound by the terms of the positive covenant under either exception.

15 The applications judge agreed with DCC 123's position. He held that the two methods relied upon by DCC 123 were clearly adopted in English law and that both of those exceptions would apply to the facts of this case. He concluded, however, that, absent legislative reform or endorsement of the English exceptions by an appellate court, he was bound by the principle of stare decisis to follow the established rule that positive covenants do not run with the land. Consequently, he granted Amberwood's application, declared that it was not bound to pay the interim expenses, and set aside the caution and notice of sale registered against Amberwood's title to the Phase 2 lands.

16 DCC 123 appealed the decision on the sole ground that the applications judge erred in finding that he was precluded by the doctrine of stare decisis from adopting the applicable English law. In response, Amberwood conceded that no precedent, binding on Stinson J. or on this court, precludes the adoption of the English exceptions. However, Amberwood argued, first, that this court, for a number of reasons, should not adopt the English exceptions and second, that even if any such exception was adopted into Ontario common law, it was not applicable to the present case.

C. ANALYSIS

(1) Analysis in a nutshell

17 The rule that positive covenants do not run with the land has been a settled principle of the English common law for well over a century and it is undisputed that it has clearly been adopted in Canada: Parkinson v. Reid, [1966] S.C.R. 162 (S.C.C.). It appears to be equally undisputed that the rule at times causes inconvenience, that its application in some cases may even result in unfairness, and that the present state of the law should be modified to meet the needs of modern conveyancing. However, it is my view that the call for reform is not one for the courts to answer but for the Legislature. Any change in the law in this area could have complex and far-reaching effects that cannot be accurately assessed on a case by case basis. The need to preserve certainty in commercial and property transactions requires that any meaningful reform be achieved by legislation that can be drafted with careful regard to the consequences.

18 Therefore, since positive covenants do not run with the land, Amberwood is not bound by the positive covenant to pay the interim expenses under the Reciprocal Agreement solely by virtue of having acquired the Phase 2 lands with notice of its terms. The question remains whether Amberwood is liable to pay the expenses under some other recognized legal principle.

19 First, DCC 123 places reliance on the doctrine of benefit and burden in Halsall v. Brizell as a method of avoiding the application of the rule. The nature and scope of this doctrine will be discussed more fully later in these reasons. Suffice it to say for the purpose of this overview that, in my view, the benefit and burden doctrine is not as wide or as settled in English law as contended by DCC 123. Furthermore, the adoption of this doctrine as a recognized exception to the rule in the common law of this province, in much the same way as the abolition of the rule itself, would have complex, far-reaching and uncertain ramifications that cannot be adequately addressed on a case by case basis.

20 The second method relied upon by DCC 123 is the conditional grant of easement. The question whether or not a provision in a conveyance is a conditional grant essentially turns on the construction of the relevant instrument, in this case the Reciprocal Agreement. In my view, there is no link between the easements conferred under the Reciprocal Agreement and the positive covenant to pay interim expenses so as to create a conditional grant within the meaning of this principle. The general clause of mutuality and reciprocity of easements, rights and provisions contained in the Reciprocal Agreement cannot be relied upon by DCC 123 to convert all positive obligations into conditional grants of easement so as to defeat the rule. As stated earlier, the rule that positive covenants do not run with the land applies despite the parties' express intention to the contrary. Hence, the applications judge erred in finding that, by virtue of section 13.1(b) of the Reciprocal Agreement, the grant of easements and benefits under section 2.3 and Article 3 was conditional upon payment of the interim expenses set out under section 2.9.

21 In the result, for different reasons than those of the applications judge, I am of the view that he was nonetheless correct in granting Amberwood's application, and I would dismiss the appeal.

(2) Introduction – 90 –

22 In a relatively recent decision, Rhone v. Stephens, [1994] 2 All E.R. 65 (U.K. H.L.), the House of Lords considered the question of the enforceability of positive covenants between owners of freehold estates including, in particular, the rule that positive covenants do not run with the land. The rule is commonly referred to as the rule in Austerberry v. Oldham (1885), 29 Ch. D. 750 (Eng. C.A.). It is unfortunate that this case was not brought to the attention of the applications judge because the judgment in Rhone v. Stephens provides a convenient framework for discussion of the issues raised in this case. Lord Templeman, in his reasons delivered on behalf of the court, set out a useful and succinct review of the law related to covenants, including the different rules governing restrictive and positive covenants, its historical development, and its underlying rationale. Lord Templeman also acknowledged the severe criticism of the present state of the law on positive covenants and the call for legislative reform made by the Law Commission in England. He also considered, and declined, the invitation to abolish the rule in Austerberry, finding that any need for reform was a matter for Parliament. Finally, he considered and rejected the argument that the rule in Austerberry had been blunted by the benefit and burden principle. Hence, many of the same issues that are raised by the parties in this case were before the House of Lords in Rhone v. Stephens. It may be useful to set out the facts in Rhone v. Stephens before reviewing the court's analysis of the legal issues.

23 In 1960, the owner of a house and adjoining cottage, known as Walford House, sold the cottage, since known as Walford Cottage. Walford House and Walford Cottage were under the same roof. The vendor covenanted for himself and his successors in title as owners of Walford House to maintain that part of the roof which was above Walford Cottage in good condition to the reasonable satisfaction of the purchasers and their successors in title. The conveyance also had the effect of conferring and confirming on each property the right to be supported by the other. After 1960, both properties were sold: Walford Cottage to the plaintiffs and Walford House to the defendant.

24 In 1986 the plaintiffs brought an action against the defendant claiming that the roof above Walford Cottage was leaking and that the defendant was in breach of the covenant to repair the roof. The trial judge found the defendant liable both in nuisance and on the covenant. He based his finding of liability on the covenant on the principle of benefit and burden. On appeal by the defendant, the Court of Appeal reversed the trial judge's decision on both grounds. The Court of Appeal found that, contrary to the finding of the trial judge, the plaintiffs were in fact owners of the roof over Walford Cottage and therefore had no cause of action in nuisance against the defendant owner of Walford House. The Court of Appeal also rejected the plaintiffs' claim that the defendant was bound by the positive covenant to repair. On further appeal to the House of Lords by the plaintiffs, the appeal was dismissed. The reasons of the House of Lords, for the most part, are apposite to this case. Hence I will make extensive reference to the analysis in Rhone v. Stephens.

(3) The common law relating to covenants affecting land

25 The House of Lords reiterated the foundational principle underlying the law relating to covenants affecting land (at p. 67):

At common law a person cannot be made liable upon a contract unless he was a party to it. In Cox v. Bishop (1857) 8 De GM & G 815, 44 ER 604 a lease was assigned to a man of straw and it was held that the covenants in the lease could not be enforced against an equitable assignee of the lease who had entered into possession. The covenants were not enforceable because there was no privity of contract or estate between the lessee and the assignee.

26 The House of Lords then noted that the rigours of the common law, which do not allow covenants to be enforced by and against successors in title, were relaxed, first by the doctrines laid down in Spencer's Case (1583), 5 Co. Rep. 16a, [1558-1774] All E.R. Rep. 68 (Eng. Q.B.), and subsequently by statutory extensions of those doctrines, resulting in different treatment being afforded at law to leaseholds. As a result of this relaxation of the rule, as between landlord and tenant, both the burden and the benefit of a covenant, which touches or concerns the land demised and is not merely collateral, run at law with the reversion and the term of the lease whether the covenant be positive or restrictive. However, as between persons interested in land other than as landlord and tenant, the law remained as established in Austerberry. At law, the benefit of a covenant may run with the land, but not the burden.

27 The different treatment afforded to leaseholds over time was not relevant to the case in Rhone v. Stephens, hence the rationale behind it was not discussed by Lord Templeman. That aspect of the law also goes beyond the scope of the question to be decided by this court. However, for the sake of completeness, a brief reference may be made to the decision in Keppell v. Bailey (1834), 2 My. & K. 517, 39 E.R. 1042 (Eng. Ch. Div.) where the court expressed the reasoning for the different treatment afforded to leasehold interests. This reasoning provides some insight into the rationale behind the rule relating to positive covenants. The court in Keppell v. Bailey expressed the view that while no harm arises from giving everyone the fullest latitude in binding themselves and their representatives in contract, "great detriment would arise and much confusion of rights if parties were allowed to invent new modes of holding and enjoying real property, and to impress upon their lands and tenements a peculiar character, which should follow them into all hands, however remote" (at p. 1049). The court was of the view, however, that the matter was very different in the case of covenants in a lease where the lessor or his assignees – 91 – continue in the reversion while the term of the lease lasts and retain control over the land. Hence, in the case of leaseholds, as opposed to freeholds, the court held that it was not at all inconsistent with the nature of property that positive covenants affecting the land bind those who take the term of the leasehold by assignment.

28 Hence, it would appear that the need for certainty in the ascertainment of title and its incidental rights served to maintain the traditional limits to the parties' contractual freedom in the case of freehold estates. I now return to the analysis in Rhone v. Stephens.

29 Despite this relaxation of the rigours of the common law with respect to leaseholds, Lord Templeman noted that the rule in Austerberry continued to apply with respect to freeholds. Hence, the rule had the following effect on the present owners of Walford House and Walford Cottage (at p. 68):

Thus cl 3 of the 1960 conveyance [the positive covenant], despite its express terms, did not confer on the owner for the time being of Walford Cottage the right at common law to compel the owner for the time being of Walford House to repair the roof or to obtain damages for breach of the covenant to repair.

30 The plaintiffs in Rhone v. Stephens argued nonetheless that equity, if not the common law, compelled the owner of Walford House to comply with the covenant to repair the roof or to pay damages instead. This argument was rejected. Lord Templeman reiterated the principle that "equity supplements but does not contradict the common law" (at p. 68). He explained how this principle led to the enforcement of restrictive covenants in equity, in the seminal case of Tulk v. Moxhay (1848), 2 Ph. 774, [1843-1860] All E.R. Rep. 9 (Eng. Ch. Div.), and why the equitable rule established in that case cannot be extended so as to enforce positive covenants (at pp. 68-69):

My Lords, equity supplements but does not contradict the common law. When freehold land is conveyed without restriction, the conveyance confers on the purchaser the right to do with the land as he pleases provided that he does not interfere with the rights of others or infringe statutory restrictions. The conveyance may however impose restrictions which, in favour of the covenantee, deprive the purchaser of some of the rights inherent in the ownership of unrestricted land. In Tulk v. Moxhay (1848) 2 Ph 774, [1843-60] All ER Rep 9 a purchaser of land covenanted that no buildings would be erected on Leicester Square. A subsequent purchaser of Leicester Square was restrained from building. The conveyance to the original purchaser deprived him and every subsequent purchaser taking with notice of the covenant of the right, otherwise part and parcel of the freehold, to develop the square by the construction of buildings. Equity does not contradict the common law by enforcing a restrictive covenant against a successor in title of the covenantor but prevents the successor from exercising a right which he never acquired. Equity did not allow the owner of Leicester Square to build because the owner never acquired the right to build without the consent of the persons (if any) from time to time entitled to the benefit of the covenant against building. In Tulk v Moxhay 2 Ph 774 at 777-778, [1843-60] All ER Rep 9 at 11 the judgment of Lord Cottenham LC contained the following passage:

'It is said, that the covenant being one which does not run with the land, this Court cannot enforce it; but the question is, not whether the covenant runs with the land, but whether a party shall be permitted to use the land in a manner inconsistent with the contract entered into by his vendor, and with notice of which he purchased.'

Equity can thus prevent or punish the breach of a negative covenant which restricts the user of land or the exercise of other rights in connection with land. Restrictive covenants deprive an owner of a right which he could otherwise exercise. Equity cannot compel an owner to comply with a positive covenant entered into by his predecessors in title without flatly contradicting the common law rule that a person cannot be made liable upon a contract unless he was a party to it. Enforcement of a positive covenant lies in contract; a positive covenant compels an owner to exercise his rights. Enforcement of a negative covenant lies in property; a negative covenant deprives the owner of a right over property. [Emphasis added.]

31 Hence, it was reasoned that the enforcement of a negative covenant in equity did not contravene the common law rule of privity of contract because, in essence, equity was simply giving effect to a legal right whose scope was restricted by the covenant. As Lord Templeman noted in Rhone v. Stephens, there was some suggestion in the jurisprudence following Tulk v. Moxhay that any covenant affecting land was likewise enforceable in equity provided that the owner of the land had notice of the covenant prior to his purchase. However, this extension of the principle did not survive the decision of the Court of Appeal in Haywood v. Brunswick Permanent Benefit Building Society (1881), 8 Q.B.D. 403 (Eng. Q.B.). The Court of Appeal in Haywood decided that, in the absence of privity of contract, it would not extend the doctrine of Tulk v. Moxhay to affirmative covenants compelling a man to lay out money or do any other act of an active character. Equity will intervene only where there is a negative covenant, expressed or implied.

32 Lord Templeman concluded his review of the existing state of the law as follows (at p. 71): – 92 –

For over 100 years it has been clear and accepted law that equity will enforce negative covenants against freehold land but has no power to enforce positive covenants against successors in title of the land. To enforce a positive covenant would be to enforce a personal obligation against a person who has not covenanted. To enforce negative covenants is only to treat the land as subject to a restriction.

33 It is common ground between the parties that this is also the settled law in Ontario. Positive covenants do not run with freehold land, either at law or in equity. Hence, consonant with the result in Rhone v. Stephens, Amberwood is not bound to pay the interim expenses contained in the Reciprocal Agreement simply by reason of having acquired the land with notice of the covenant.

(4) The call for reform

34 The need for reform in this area of the law, and the different approaches that should be adopted to effect it, informed much of the argument advanced by the parties on this appeal. The determinative issues on this appeal were framed by the parties in terms of the English "exceptions" to the rule in Austerberry and their potential application to this case. DCC 123 took the position that the English exceptions were well established and it urged this court to adopt these principles as an incremental and much needed change in the law. Amberwood, on the other hand, took the position that the existence and scope of each exception was a matter of much controversy in England and in other common law jurisdictions and that, even if either exception was found to apply to the facts of this case, any reform in this area of the law was a matter for the Legislature and not the courts.

35 Hence, before dealing with the particular issues raised by the parties, it may be useful to briefly describe the need for reform in this area of the law, as identified by the OLRC and like bodies in some other common law jurisdictions.

36 In its 1989 Report on Covenants Affecting Freehold Land, the OLRC dealt with both positive and restrictive covenants affecting land, other than those between landlord and tenant. It defined a positive covenant as "one that requires a person to do something on his or her land." (p.1 Executive Summary).

37 In an attempt to determine the rationale behind the rule that positive covenants do not run with the land, the OLRC made reference to the decision in Keppell v. Bailey, referred to earlier, and deduced from this decision that there were two related rationales. First, "such covenants would tend to render land inalienable" and second, "persons dealing subsequently with the land would have great difficulty in ascertaining the existence of such covenants, because they do not normally have a physical manifestation" (at p. 21).

38 The OLRC rejected both rationales as inapplicable to the reality of conveyancing in Ontario. With respect to the concern for inalienability, the OLRC observed that "it has now been generally recognized . . . that [positive covenants] do not tend to render land inalienable. On the contrary, positive and negative covenants tend to enhance alienability since they operate to protect the amenities of neighbourhoods and the competitiveness of businesses" (at pp.100-01). With respect to the concern for the difficulty in ascertaining the existence of such covenants, the OLRC stated that it "is not now, and was not then, an obstacle in Ontario" (at p.22) given Ontario's land registration system, a system that did not generally exist in England at the time of the Keppell decision.

39 The OLRC further commented on the relatively common use of affirmative covenants despite the existing rule, and on some of the difficulties that have arisen as a result. Indeed, this case provides an example of the kind of difficulty described by the OLRC (at p. 101):

As a practical matter, the use of affirmative covenants is relatively common, particularly in connection with land developments. Positive covenants, for example, are often contained in subdivision agreements, entered into between developers and municipalities. In this context, however, positive covenants create few problems, since they have the sanction of statute. The situation is otherwise, however, with respect to covenants given by builders to the subdivider. Frequently these include positive obligations, for example, with respect to paving, sodding, and the installation of street lights. Even though builders' covenants are usually limited in time to ten or twelve years, the fact that the burden of a positive covenant does not survive an assignment of the land by the builder can cause difficulties. Similarly, covenants are often imposed upon the ultimate purchasers, either by the subdivider or by the builder. Again, they often contain positive as well as negative obligations. Once again, however, even though these obligations are usually restricted in time to ten or twelve years, the fact that the burden of a positive covenant cannot run with the land may create difficulties.

Finally, we note that the running of the burden of positive covenants is not a phenomenon entirely unknown to the law. Since privity of estate exists between a lessor and a lessee, and their respective assigns, the burden of certain leasehold covenants will run, either with the term of the lease or with the reversion, irrespective of whether the obligation is positive or negative. – 93 –

In addition, the burden of positive covenants are permitted to run in the context of condominiums, which are governed in Ontario by specific legislation. However, there are many situations in which condominium legislation might not be appropriate - for example, in the case of a duplex, or other building having more than one owner, that is not large enough to be made into a statutory condominium. Like the owners of condominium units, the owners of the several units in such buildings might wish to enter into positive covenants that run with the land, particularly respecting such matters, for example, as the maintenance of common walls, decoration and landscaping.

40 In light of the absence of any applicable rationale for the rule and of the difficulties it posed, the OLRC was of the view that the law required reform (at pp. 101-02):

We have reached the conclusion that the present law, which prohibits the running of the burden of positive covenants upon a transfer of freehold land, operates to defeat the legitimate expectations of the parties. In our view, there can be no principled rationale for a rule that would preclude neighbours from agreeing, for example, to maintain a boundary fence, or, to keep certain drains clear, such that the covenant would run with the land. Nor is it justifiable, in our view, that, in a property development providing for parks, open spaces, and other amenities, obligations to pay for the maintenance of these amenities cannot be enforced against the successors of the original contracting parties. In addition, to the extent that a variety of methods have been developed to circumvent the undesirable effect of the present law, it has been productive of much uncertainty and confusion. For the foregoing reasons, the Commission recommends that the law should be reformed to permit the burden of affirmative obligations to run upon a transfer of freehold land.

41 The OLRC further concluded that the present law of restrictive covenants was also in need of reform because it is unduly complex and uncertain. Hence, the OLRC was of the view that the need for reform arose both from the uncertain and complex state of the law with respect to restrictive covenants, and the existing gap with respect to positive covenants.

42 A similar need for reform has been identified in the United Kingdom and in New Zealand. Recommendations were made by the Committee on Positive Covenants Affecting Land in the United Kingdom in a Report presented to the British Parliament in 1965 and by the Law Commission in another Report laid before the British Parliament in 1984 entitled Transfer of Land: The Law of Positive and Restrictive Covenants. Recommendations for reform were made in New Zealand by the Property Law and Equity Reform Committee in a document named Report on Positive Covenants Affecting Land which was presented to the Minister of Justice in 1985.

43 The OLRC proceeded to make specific recommendations for reform. It expressed the view that it would not be sufficient simply to import positive covenants into the common law of restrictive covenants because that law "is inherently incapable of providing adequately for positive obligations" (at p.104) and, in any event, the law on restrictive covenants itself is in need of reform. The OLRC therefore recommended that a new type of servitude should be created that would encompass both positive and negative obligations and would provide for the differing requirements of each. A number of issues are then discussed in the 1989 Report.

44 In my view, the sheer number and complexity of issues that would have to be considered in order to address the various concerns relating to such reform of the law make it abundantly clear that any significant change requires a legislative initiative. A case by case approach would create unmanageable confusion and uncertainty in the law. By way of illustration, I note some of the questions discussed in the OLRC 1989 Report:

• what should the new "land obligation" encompass

• whether land obligations should be divided into "neighbour obligations" and "development obligations" as recommended by the Law Commission in England

• whether a land obligation should be appurtenant to an estate in land or to the land itself and whether a statutory priority provision should be implemented

• whether land obligations should always be appurtenant to land or whether they should be permitted to exist "in gross" or independently of a dominant tenement, hence allowing for enforcement by a non owner (e.g. a homeowners' association under a building scheme)

• whether specific provisions should be made for development schemes and building schemes

• who may enforce the benefit of the land obligation and who should bear the burden

• what remedies should be available – 94 –

• what prescription period should apply

• how land obligations should be varied or extinguished

45 The OLRC further noted a number of consequential changes that would have to be made in the law. It is clear from this discussion that a number of amendments would have to be made to existing legislation to give effect to any new scheme that would allow positive covenants to run with the land, including amendments to the Land Titles Act, R.S.O. 1980, c. 230 [now R.S.O. 1990, c. L.5], the Registry Act, R.S.O. 1980, c. 445 [now R.S.O. 1990, c. R.20], the Conveyancing and Law of Property Act, R.S.O. 1980, c. 51 [now R.S.O. 1990, c. C.34], and the Perpetuities Act, R.S.O. 1980, c. 374 [now R.S.O. 1990, c. P.8].

46 It may be useful at this point to return to the analysis in Rhone v. Stephens because the House of Lords made reference to a similar call for reform in England. Lord Templeman made reference to the Reports submitted to Parliament by the Law Commission, and noted that nothing had been done in response to them. In these circumstances, the court was invited to overrule the decision in Austerberry. Lord Templeman rejected this suggestion (at p. 72):

To do so would destroy the distinction between law and equity and to convert the rule of equity into a rule of notice. It is plain from the articles, reports and papers to which we were referred that judicial legislation to overrule the Austerberry case would create a number of difficulties, anomalies and uncertainties and affect the rights and liabilities of people who have for over 100 years bought and sold land in the knowledge, imparted at an elementary stage to every student of the law of real property, that positive covenants affecting freehold land are not directly enforceable except against the original covenantor. Parliamentary legislation to deal with the decision in the Austerberry case would require careful consideration of the consequences. Moreover, experience with leasehold tenure where positive covenants are enforceable by virtue of privity of estate has demonstrated that social injustice can be caused by logic. Parliament was obliged to intervene to prevent tenants losing their homes and being saddled with the costs of restoring to their original glory buildings which had languished through wars and economic depression for exactly 99 years.

47 In my view, the wisdom of these observations is unassailable. Similar words of judicial restraint were echoed in R. v. York (Township), [1960] O.R. 238 (Ont. C.A.) where this court was urged to extend the doctrine on restrictive covenants in Tulk v. Moxhay to covenants in gross, that is, to covenants existing independently of a dominant tenement. Morden J.A. stated as follows (at pp. 243-44):

. . . it is, not only undesirable but in my opinion, too late now for this Court to return to the position as it was in 1848 and give countenance to a development of the doctrine along such substantially different lines; we ought, I think, to adhere to the greatly restricted scope of the doctrine in Tulk v. Moxhay as evidenced by the numerous decisions subsequent to that case. A restrictive covenant enforceable between persons other than the original parties is, in effect, an equitable interest in property. It is well recognized that decisions affecting real property upon the basis of which titles are passed and accepted should not lightly be disturbed; this is one branch of law which requires stability. As Middleton, J.A., said in Re Hazell (1925), 57 O.L.R. 290, at p. 294:

It is a well-established principle of real property law that questions such as this one, placed at rest, should not be again agitated, even if it should be shewn that the earlier decisions are not in all respects satisfactory.

48 These principles of judicial restraint were also reiterated in Friedmann Equity Developments Inc. v. Final Note Ltd. (2000), 188 D.L.R. (4th) 269 (S.C.C.) where the Supreme Court of Canada considered whether the sealed contract rule should be abolished. Contrary to this case, the Supreme Court rejected the contention that the rule was in need of reform. Nonetheless, the general principles that govern judicial reform of the common law set out in the judgment of the Court are entirely apposite to this case. I note some of the more relevant excerpts from the judgment of Bastarache J., writing for a unanimous Court (at pp. 290-91):

Before examining whether the criticisms raised above merit the abolition of the sealed contract rule, it is necessary to understand the principles which govern judicial reform of the common law. In the past, this Court has considered the conditions which must be present to effect a change in the common law in several cases: see, e.g., Vetrovec v. The Queen, [1982] 1 S.C.R. 811, 136 D.L.R. (3d) 89; Watkins v. Olafson, [1989] 2 S.C.R. 750, 61 D.L.R. (4th) 577; R. v. Jobidon, [1991] 2 S.C.R. 714; R. v. Salituro, [1991] 3 S.C.R. 654; R. v. B. (K.G.), [1993] 1 S.C.R. 740; R. v. Robinson, [1996] 1 S.C.R. 683, 133 D.L.R. (4th) 42; Bow Valley Husky (Bermuda) Ltd. v. Saint John Shipbuilding Ltd., [1997] 3 S.C.R. 1210, 153 D.L.R. (4th) 385. From these cases, some general principles have emerged. A change in the common law must be necessary to keep the common law in step with the evolution of society (see, e.g., Salituro, at p. 670; Bow Valley, at para. 93), to clarify a legal principle (see Vetrovec, at p. 819), or to resolve an inconsistency (see Jobidon, at p. 733). In addition, the change should be incremental, and its consequences must be capable of assessment. – 95 –

. . .

On the other hand, courts will not intervene where the proposed change will have complex and far-reaching effects, setting the law on an unknown course whose ramifications cannot be accurately measured: see Bow Valley, supra, at para. 93. The rationale for judicial restraint in making changes to the common law was expressed by McLachlin J. (as she then was) in Watkins, supra, as follows, at p. 760:

The court may not be in the best position to assess the deficiencies of the existing law, much less problems which may be associated with the changes it might make. The court has before it a single case; major changes in the law should be predicated on a wider view of how the rule will operate in the broad generality of cases. Moreover, the court may not be in a position to appreciate fully the economic and policy issues underlying the choice it is asked to make.

49 For reasons set out earlier, it is my view that the law on positive covenants is one such area where courts should be wary of making changes to the common law. The Supreme Court of Canada also made a number of other observations that are of relevance to this case (at pp. 292-96):

Our common law is replete with artificial rules which, although they may appear to have no underlying rationale, promote efficiency or security in commercial transactions. Such rules, in the circumstances where they apply, must be followed to create a legally recognized and enforceable right or obligation. Parties, therefore, structure their relations with these rules in mind and the rules themselves become part of commercial reality. Commercial relations may evolve in such a way that a particular rule may become unjust and cumbersome, and may no longer serve its original purpose. When the hardship which a rule causes becomes so acute and widespread that it outweighs any purpose that it may have once served, it is certainly open to a court to make an incremental change in the law. However, there must be evidence of a change in commercial reality which makes such a change in the common law necessary.

. . .

Notwithstanding my view that there has been no change in commercial reality which makes the abolition of the sealed contract rule necessary, to effect such a change could also have unwarranted, far-reaching and complex consequences both in the law of contract and in the law of property.

. . .

The abolition of the sealed contract rule would thus amount to a fundamental reform of the common law rather than an incremental change.

To abolish the sealed contract rule for the reasons that the appellant has suggested would also have the effect of creating great uncertainty both in commercial relations and in the law itself. There are many rules in contract and property law which are historical, technical and which no longer appear to have any modern day rationale. However, they remain a part of the law.

. . .

The abolition of the sealed contract rule could also have far-reaching effects on existing contractual relationships.

. . .

The abolition of the sealed contract rule would have the unfair result of creating uncertainty for those who had relied on the rule in executing their contracts. To avoid uncertainty and any unfairness to those parties who have structured their commercial relationships in accordance with the sealed contract rule, any change to the law should operate prospectively. Only the Legislature has the power to create a prospective change in the law.

. . .

In my view, the need to preserve certainty in commercial relations must be considered when a court is asked to make a change to the sealed contract rule. For example, a statement that the sealed contract rule does not apply to corporations would create uncertainty as to the potential liability of all those individuals who had corporate agents insulate them from any obligations under the contract by executing it under seal. While such uncertainty may not be as widespread as that which would result from the outright abolition of the rule, such a change in the law could still have the effect of frustrating the intentions of those parties who entered into their agreements with the understanding that the rule applied. Courts should be loath to make even smaller modifications to the sealed contract rule without – 96 – clear evidence that such a change is necessary to keep in step with evolving commercial reality and that it will not have unwarranted far-reaching effects.

50 I therefore conclude that any modification to the rule that positive covenants do not run with the land should be made by the Legislature, and not by this court. Hence, Amberwood is not bound by the positive covenant to pay the interim expenses under the Reciprocal Agreement solely by virtue of having acquired the Phase 2 lands with notice of its terms. The question remains whether Amberwood is liable to pay the expenses under some other recognized legal principle.

(5) Statutory exceptions to the rule

51 Although the Ontario Legislature has not adopted a comprehensive scheme to deal with covenants affecting freehold land, there are a number of statutory exceptions to the rule that positive covenants do not bind freehold successors in title. For example, the burden of certain positive covenants made in favour of public bodies can run with the land under the provisions of the Planning Act, R.S.O. 1990, c. P.13. Similarly, the Condominium Act, 1998, S.O. 1998, c. 19 permits the enforcement of such covenants for condominiums governed by the statute. For various examples of other specific statutory exceptions to the rule see the following: Agricultural Research Institute of Ontario Act, R.S.O. 1990, c. A.13, ss. 3(f)(i), 4.1 and 4.2; Building Code Act, 1992, S.O. 1992, c. 23, ss. 8(3)(c)(iv), and 8(5); Conservation Land Act, R.S.O. 1990, c. C.28, ss. 3(2)-(10); Drainage Act, R.S.O. 1990, c. D.17, ss. 2(1)-(4); Forestry Act, R.S.O. 1990, c. F.26, ss. 2(1) and 3; Industrial and Mining Lands Compensation Act, R.S.O. 1990, c. I.5, ss. 1-4; Niagara Escarpment Planning and Development Act, R.S.O. 1990, c. N.2, ss. 24(2.1), 27(1) and 27(7); Ontario Heritage Act, R.S.O. 1990, c. O.18, ss. 22 and 37; Planning Act, R.S.O. 1990, c. P.13, ss. 28(10)-(11), 37(3)-(4), 41(7)(c), 41(8), 41(10), 51(16), 51(25)-(27), 70.2(2), and 70.2(5); Public Lands Act, R.S.O. 1990, c. P.43, ss. 46(2)-(3); and Surveys Act, R.S.O. 1990, c. S.30, ss. 61(1) and 61(4).

52 The statutory exceptions to the rule do alleviate some of the difficulties that could otherwise arise from a strict application of the common law rule. However, it is common ground between the parties that no statutory exception applies to this case so as to allow the positive covenant to run with the land.

(6) Non-statutory methods to circumvent the rule

53 The inconvenience of the rule that the burden of a positive covenant cannot run with the land has resulted in the development of a number of methods by which its effect can be circumvented so as to obtain enforcement at law. The OLRC noted some of these methods in its 1989 Report and they are further described in Megarry and Wade, The Law of Real Property, 6th ed. (London: Sweet and Maxwell, 2000) at pp. 1006-1010.

54 The simplest and most obvious way of avoiding the rule altogether is to use a chain of covenants so as to maintain privity of contract. Indeed, if the chain had not been broken in this case by WHDC's financial difficulties, resulting in power of sale proceedings, in all likelihood the terms of the Reciprocal Agreement would have been included in any sale of the Phase 2 lands to a subsequent purchaser. Other devices, not relevant to this case, include use of a right of entry annexed to rentcharge, rights of re-entry generally, and an enlarged long lease (a long lease which can be enlarged into a fee simple under statutory power).

55 As stated earlier, DCC 123 relies on two exceptions or methods in this case: the principle of benefit and burden, referred to as the doctrine in Halsall v. Brizell, and the conditional grant. DCC 123 maintains that these two exceptions have been recognized by English courts, that they should be adopted in this province, and that Amberwood, as present owner of the Phase 2 lands, should be held liable on the covenant to pay the interim expenses under either or both of these exceptions. I will deal with each exception in turn.

(a) The doctrine in Halsall v. Brizell

56 The applications judge described the doctrine in Halsall v. Brizell in terms of the general underlying principle that "a person who claims the benefit of a deed must also take it subject to its burdens." (at para. 23, p. 676) He held that this doctrine "has been clearly adopted by the English courts." (at para. 24, p. 676) In support of this conclusion, he relied on the decision of the English Court of Appeal in E.R. Ives Investment Ltd. v. High (1966), [1967] 1 All E.R. 504 (Eng. C.A.) and on the decision of the Chancery Division in Tito v. Waddell, [1977] 3 All E.R. 129 (Eng. Ch. Div.). He then noted that while the principle of benefit and burden had not been applied in Canadian law, Halsall v. Brizell had been mentioned by the Supreme Court of Canada in Parkinson v. Reid. The applications judge stated as follows (at paras. 26-27, p. 677):

In that case the court held that the obligation to repair a stairway that had been damaged in a fire was a positive covenant that did not run with the land to bind successors in title. The original parties had agreed that a neighbour could use a wall as a party-wall so long as he agreed to keep the stairway in good repair. In obiter, Cartwright J. commented on the potential applicability of the benefit/burden doctrine to this type of scenario: – 97 –

Assuming that so long as the appellants [the successors] made use of the last-mentioned wall as a party wall they were bound to keep the stairway in repair, they ceased to be under any such obligation when they no longer made use of the respondent's wall.

I take from this that while the general proposition that positive covenants do not run with the land remains the law in Canada, the Supreme Court might be prepared to hold that a successor who claims a benefit must also shoulder the burden, whatever its form. However, if the successor abandons its claim to the benefit, or the benefit ceases to exist, as occurred in Parkinson v. Reid, the benefit/burden doctrine from Halsall v. Brizell would not apply. To date, however, the Supreme Court has not expressly addressed this point.

57 The applications judge then considered whether the benefit and burden principle could apply to the facts of this case. He concluded that it could, for the following reasons (at paras. 28-30, pp. 677-78):

In determining whether the benefit/burden doctrine could operate as an exception to the rule against positive covenants in this case, it is necessary to determine whether there is a benefit flowing from DCC 123 and the Phase I condominium to Amberwood's vacant lands.

In my view, there are such benefits. First, Amberwood is part owner of the recreational and utility units in the Phase I building. Second, those units are maintained for Amberwood by DCC 123. Third, Amberwood has the benefit of security over those units. Fourth, Amberwood has the access benefits of the other easements provided for in the reciprocal agreement. Although I agree with Amberwood that these benefits may be somewhat remote or artificial and would certainly have more significance if a second condominium was actually built on the Phase II lands, I do not interpret the doctrine from Halsall as requiring a court to analyze the extent or nature of the benefit. If Amberwood chose to abandon its claim to these benefits, it would not be bound to shoulder the burden of the interim costs. In my view, the fact that Amberwood does not wish to abandon these entitlements confirms that they can be fairly and properly characterized as true benefits flowing to the successor/owner.

Consequently, I conclude that the benefit/burden doctrine from Halsall v. Brizell could apply on the facts of this case.

58 As stated earlier, the applications judge concluded, however, that it was not open to him to adopt the doctrine in Halsall v. Brizell given the present state of the law in Canada.

59 It is important to determine with more precision the nature and scope of the doctrine in Halsall v. Brizell and to examine the extent to which it has been adopted in English law before deciding whether it should be imported into Ontario law and, if so, whether it applies to the facts of this case.

60 In Halsall v. Brizell, purchasers of plots on a building estate were entitled under a trust deed to use private roads and other amenities, including sewers placed under the roads, and each, on purchasing a lot, covenanted to pay a just proportion of the cost of their maintenance. A question arose whether the purchasers' successors were liable for their due contribution while they made use of the roads.

61 Upjohn J. of the Chancery Division stated first, that a covenant in the terms of the covenant to pay the maintenance cost does not run with the land. Second, he noted that the particular provisions infringed the rule against perpetuities. Notwithstanding these difficulties, he held as follows (at p. 377):

It is, however, conceded to be ancient law that a man cannot take benefit under a deed without subscribing to the obligations thereunder. If authority is required for that proposition, I refer to one sentence during the argument in Elliston v. Reacher (1) ([1908] 2 Ch. 665), where Sir Herbert Cozens-Hardy, M. R., said (ibid., at p. 669):

"It is laid down in Coke on Littleton, 230b, that a man who takes the benefit of a deed is bound by a conditon contained in it though he does not execute it."

62 Upjohn J. concluded that if the defendants did not desire to take the benefit of the deed, they could not be liable to contribute to the maintenance cost. However since they did desire to use the roads of the park and the other benefits created by the trust deed, they were liable to contribute to the maintenance cost pursuant to the covenant.

63 The OLRC briefly referred to the doctrine in Halsall v. Brizell in its 1989 Report as a method of avoiding the rule (at p.23):

A third method of avoiding the rule is to rely upon the doctrine in Halsall v. Brizell, [1957] Ch. 169, [1957] All E.R. 371. See, also, Tito v. Waddell No.2), [1977] Ch. 106, at 292 and 310, [1977] 3 All E.R. 129. This doctrine is based upon the old rule, relating to deeds, that a person who claims the benefit of a deed must also take it subject to the burdens. In the Halsall case, the purchasers of lots in a subdivision were entitled, under a trust deed, to use private – 98 – roads and other amenities. Each purchaser covenanted to pay a share of the cost to maintain the amenities. The court held that their successors were liable to pay their share of the cost. The usefulness of the doctrine, however, is somewhat limited. It will operate only if there is a benefit to be claimed under the deed, and further, it will operate only so long as the assignee of the covenantor continues to claim that benefit.

64 The OLRC made further reference to the doctrine in Halsall v. Brizell later in its 1989 Report when it considered the future treatment of existing covenants after the adoption of the new recommended regime of land obligations. The OLRC recommended that the existing law continue to apply for covenants already in existence, stating in reference to this doctrine - "[w]e do not intend that this rule should be abolished" (at p.149). However, no mention is made of the fact that this doctrine has never been adopted in Canada and no further analysis of the doctrine was contained in the 1989 Report.

65 I note from the outset what will become clear from a review of the relevant jurisprudence that the doctrine in Halsall v. Brizell cannot simply be defined by reference to the underlying general principle "that a person who claims the benefit of a deed must also take it subject to the burdens". Indeed, if the doctrine were so wide as to obligate a successor in title to all the burdens contained in the deed simply by reason of his acceptance of the benefit of the deed, it would swallow the rule. Positive covenants would run with the land. Hence, while this general principle may have informed the reasoning underlying the concession of counsel in Halsall v. Brizell, reference must be made to later applications of the doctrine to further refine it.

66 Before referring to the subsequent jurisprudence, it is noteworthy that the decision in Halsall v. Brizell has been the subject of much debate and criticism. A frequently published commentator on English property law, F.R. Crane, has pointed out some of the weaknesses of the decision in a case comment at 21 [1957] The Conveyancer & Property Lawyer 160. He noted that the court in Halsall v. Brizell effectively by-passed both the decision in Austerberry and the rule against perpetuities, citing as only authority for doing so a brief remark by Lord Cozens- Hardy M.R. during argument in Elliston v. Reacher, [1908] 2 Ch. 665 (Eng. C.A.) which did not form part of the judgment. R. E. Megarry (as he then was) also pointed out the frail underpinnings of Halsall in a 1957 case comment (1957), 73 L.Q.R. 154 at 155-56. He noted that the observation of Lord Cozens-Hardy M.R. in Elliston v. Reacher, relied upon by Upjohn J., provided doubtful authority for the proposition since it was simply made during the address by counsel and did not form part of the judgment. Further, the passage relied upon from Coke on Littleton confined the operation of the benefit and burden rule to a party who is specifically named in a deed but who does not execute it.

67 The subsequent case of Tito v. Waddell ("Tito'scase"), that has applied the doctrine in Halsall v. Brizell, is of particular relevance to DCC 123's position. Indeed, the distinction sought to be made by DCC 123 between the benefit and burden principle on the one hand, and the conditional grant on the other, stems from the judgment of Vice-Chancellor Megarry in Tito's case.

68 Tito's case was lengthy and complex, involving a multitude of issues. However, it is not necessary for the purpose of this appeal to discuss it in any detail. The only part of the decision that is relevant to this case is Megarry V-C's discussion of the doctrine in Halsall v. Brizell. Ironically, the frailty of Halsall v. Brizell was the subject of substantial analysis in the judgment. However, of particular relevance to the appellant's position is Megarry V-C's identification of two aspects (amongst others) of the doctrine in Halsall v. Brizell - the conditional grant, and what Megarry V-C called the "pure principle of benefit and burden". He described the first as a function of the creating instrument that in effect attaches conditions to the exercise of a right and thereby restricts the scope of the benefit itself, and the second as a general category where the benefit and burden, although arising under the same instrument, are independent of each other. He stated as follows (at p. 281):

(a) Conditional benefits and independent obligations. One of the most important distinctions is between what for brevity may be called conditional benefits, on the one hand, and on the other hand independent obligations. An instrument may be framed so that it confers only a conditional or qualified right, the condition or qualification being that certain restrictions shall be observed or certain burdens assumed, such as an obligation to make certain payments. Such restrictions or qualifications are an intrinsic part of the right; you take the right as it stands, and you cannot pick out the good and reject the bad. In such cases it is not only the original grantee who is bound by the burden; his successors in title are unable to take the right without also assuming the burden. The benefit and the burden have been annexed to each other ab initio, and so the benefit is only a conditional benefit. In the other class of case the right and the burden, although arising under the same instrument, are independent of each other: X grants a right to Y, and by the same instrument Y independently covenants with X to do some act. In such cases, although Y is of course bound by his covenant, questions may arise whether successors in title to Y's right can take it free from the obligations of Y's covenant, or whether they are bound by them under what for want of a better name I shall call the pure principle of benefit and burden.

69 The two aspects of the doctrine identified by Megarry V-C in Tito's case must be read in the light of the subsequent decision by the House of Lords in Rhone v. Stephens. While the House of Lords accepted that – 99 – conditions could be attached to the exercise of a power or a right, thereby rendering the conditions enforceable upon the exercise of the power or right, it rejected any notion of a "pure principle of benefit and burden" that would bind successors to burdens that stood independently of the right. Lord Templeman stated as follows (at p.73):

Mr. Munby also sought to persuade your Lordships that the effect of the decision in the Austerberry case had been blunted by the 'pure principle of benefit and burden' distilled by Megarry V-C from the authorities in Tito v. Waddell (No 2), [1977] 3 All E.R. 129 at 291-292, [1977] Ch 106 at 301-303. I am not prepared to recognise the 'pure principle' that any party deriving any benefit from a conveyance must accept any burden in the same conveyance. Megarry V-C relied on the decision of Upjohn J. in Halsall v. Brizell, [1957] 1 All E.R. 371, [1957] Ch. 169. In that case the defendant's predecessor in title had been granted the right to use the estate roads and sewers and had covenanted to pay a due proportion for the maintenance of these facilities. It was held that the defendant could not exercise the rights without paying his costs of ensuring that they could be exercised. Conditions can be attached to the exercise of a power in express terms or by implication. Halsall v. Brizell was just such a case and I have no difficulty in whole-heartedly agreeing with the decision. It does not follow that any condition can be rendered enforceable by attaching it to a right nor does it follow that every burden imposed by a conveyance may be enforced by depriving the covenantor's successor in title of every benefit which he enjoyed thereunder. The condition must be relevant to the exercise of the right. In Halsall v. Brizell there were reciprocal benefits and burdens enjoyed by the users of the roads and sewers. In the present case cl 2 of the 1960 conveyance imposes reciprocal benefits and burdens of support but cl 3 which imposed an obligation to repair the roof is an independent provision. In Halsall v. Brizell the defendant could, at least in theory, choose between enjoying the right and paying his proportion of the cost or alternatively giving up the right and saving his money. In the present case the owners of Walford House could not in theory or in practice be deprived of the benefit of the mutual rights of support if they failed to repair the roof.

70 Megarry and Wade, in their text on The Law of Real Property, at pp.1008-1010, reviewed some of the relevant jurisprudence, including the decision of the English Court of Appeal in E.R. Ives Investment Ltd. relied upon by the applications judge and Tito's case, and concluded that there must now be some doubt as to their correctness and as to the precise extent of the benefit and burden principle given the subsequent decision of the House of Lords in Rhone v. Stephens. The authors comment as follows (at pp. 1009-1010):

The House of Lords has rejected any "pure" principle of benefit and burden, by which "any party deriving any benefit from a conveyance must accept any burden in the same conveyance". Although the House accepted that conditions could be attached expressly or impliedly to the exercise of a power, this was so only where the condition was "relevant to the exercise of the right". The party must, "at least in theory", be able to elect between enjoying the right and performing his obligation or renouncing the right and freeing himself of the burden. On that basis, the House held that the fact that A's roof was supported by B's property did not mean that B could enforce against A a positive covenant made by A's predecessor in title with B's to repair the roof. This approach provides little guidance as to when a party will be regarded as having a genuine choice whether or not to renounce the benefits in order to be relieved of the burdens.

. . .

The policy underlying the decision of the House seems to be to restrict the ambit of the doctrine of benefit and burden as a means of circumventing the rule that the burden of positive covenants does not run. The intention would seem to be to prompt the abolition of the rule by legislation that had been drafted with careful regard to the consequences.

71 In the subsequent case of Thamesmead Town Ltd. v. Allotey, [1998] 37 E.G. 161 (Eng. C.A.), Gibson L.J., writing for the unanimous English Court of Appeal, noted several difficulties with the reasoning in Rhone v. Stephens and concluded his judgment by expressing agreement with Professor Gravells' view expressed in an article on Rhone v. Stephens at (1994), 110 L.Q.R. 346, at p.350, that since the House of Lords has "clearly ruled out a judicial solution, it is for Parliament to provide a legislative solution."

72 In my view, the case law does not support the applications judge's finding that the benefit and burden principle has been clearly adopted by the English courts as an exception to the rule that positive covenants do not run with the land. Indeed, had Rhone v. Stephens been brought to his attention, the applications judge undoubtedly would have held that the "pure" principle of benefit and burden, relied upon by DCC 123 in this case and identified as an aspect of the doctrine in Halsall v. Brizell by Megarry V-C in Tito's case, was later expressly rejected by the English courts.

73 Further, the applications judge's conclusion that the benefit and burden principle would apply to the facts of this case is not consonant with the English jurisprudence. He concluded that Amberwood was bound by the burden of the covenant because it had received the following benefits: part ownership of the recreational and utility units in the Phase 1 building; payment by DCC 123 for the maintenance of, and security over, those units; and easements – 100 – over the Phase 1 lands. However, the simple fact that Amberwood received certain benefits upon obtaining title to the Phase 2 lands is clearly not sufficient, without more, under the English common law to render it liable under the positive covenant contained in the same instrument. In so far as the easements over the Phase 1 lands are concerned, DCC 123 has not established any correlation between those benefits and the burden of the positive covenant, so as to justify the application of the English doctrine. In so far as the benefits related to the recreational facilities are concerned, DCC 123 has not shown any user or enjoyment of the benefit by Amberwood. While DCC 123 recognizes in its supplementary factum that those requirements cause difficulties in this case, it purports to resolve the issue by submitting that an "all or nothing" principle should be adopted in Ontario so as to bind Amberwood to all the terms of the Reciprocal Agreement, whether or not there is any direct link or any de facto use or enjoyment of the intended benefits. In my view, the adoption of such a wide exception would be tantamount to abolishing the rule itself. Any successor in title would be bound by the positive covenant by reason solely of its acceptance of the deed to the land.

74 I note further, with respect to the findings of the applications judge, that whatever rights or obligations may flow from the fact that the parties are presently co-owners of the recreational facilities to which the costs are related are irrelevant to, and beyond the scope of, the present application. The co-ownership, created not by the Reciprocal Agreement but by a later conveyance between DCC 123 and one of Amberwood's predecessors in title, may well give rise to other issues that relate to the same interim costs, but it has no bearing on the question whether Amberwood is liable on the covenant contained in the Reciprocal Agreement.

75 Therefore, I conclude that, on proper consideration of the scope of the English doctrine in Halsall v. Brizell, Amberwood would not be liable to pay the interim expenses on that basis if the exception were adopted in Ontario law. In any event, it is my view that, having regard to the uncertainties and the many frailties of the existing common law in England in this area of the law, it would be inadvisable to adopt these principles in Ontario. Indeed, a review of the English experience with the doctrine of Halsall v. Brizell, lends further support to the conclusion that any reform to the rule in Austerberry is best left to the Legislature. It would appear from many of the commentaries that the English adoption of the benefit and burden exception may have created more problems than it has solved.

76 Quite apart from the uncertainties that the adoption of the exception could create in other existing commercial relationships, it is my view that the application of the benefit and burden principle in this case could give rise to a multitude of other issues, particularly in the event of non-compliance. I pose but a few hypothetical questions by way of example. What benefits would Amberwood lose if it failed to pay the interim costs? Would it simply lose any right to use the shared facilities? Or would all the easements be extinguished? Could any or all of these benefits be revived upon paying the arrears? Could the benefits be revived at any time by payment of the arrears whether it be by Amberwood or a subsequent purchaser? Or would payment have to be made within a reasonable time? Would Amberwood be liable to lose the benefit of the land itself because it did not pay the interim costs? Are these interim costs to be paid indefinitely, even if no second tower is ever built on the Phase 2 lands?

77 While issues of this kind are not at all remarkable in the context of a contractual dispute between parties, they do create much uncertainty when they arise by reason of a covenant that runs with the land because they affect the certainty of title. Indeed, in this case, Amberwood has sold the Phase 2 lands. How then would the subsequent purchaser's title to the lands be affected by the answer to these hypothetical questions? These questions exemplify some of the issues identified by the OLRC in its 1989 Report as matters that would need to be addressed by the Legislature under any scheme allowing for positive covenants to run with the land.

78 For these reasons, I would not give effect to this ground of appeal.

(b) The conditional grant

79 The applications judge also considered whether the rule that positive covenants do not run with the land was subject to the conditional grant exception in English law and whether this exception would apply to this case. He described the exception by reference to Halsbury's Laws of England as follows (at para.32, p. 678):

If the facts establish that the granting of a benefit or easement was conditional on assuming the positive obligation, then the obligation is binding. Where the obligation is framed so as to constitute a continuing obligation upon which the grant of the easement was conditional, the obligation can be imposed as an incident of the easement itself, and not merely a liability purporting to run with the land: Halsbury's Laws of England 4th ed., Vol. 14 at 79.

80 The applications judge relied on the decision of the English Court of Appeal in Ellenborough Park, Re, [1955] 3 All E.R. 667 (Eng. Ch. Div.) as authority for the proposition that a positive obligation runs with the land when it forms part of an easement or benefit that is made conditional on assuming it. He also referred to Tito's case. He concluded this review of the English common law with the following observations (at para. 37, p. 679): – 101 –

Once again, this "conditional grant" approach to circumventing the rule against positive covenants flowing with the land, is an English innovation. Although there does not seem to be any Canadian law which expressly recognizes or applies the conditional grant exception, such an exception is consistent with the benefit/burden doctrine. In my view, the conditional grant exception is essentially a form of the benefit/burden doctrine. The only difference is that the burden is directly annexed to the grant of the benefit, instead of the subject of an independent covenant. The notion of a conditional grant exception is also consistent with the recognition that the ancient rule against positive covenants flowing with title has many problematic implications. Such an exception would also function to protect legitimate party expectations.

81 The applications judge then concluded that this exception would apply to this case on the basis of article 13.1(b) of the Reciprocal Agreement. I again reproduce this general provision for convenience:

Section 13.1 - Provisions Run with the Land

. . .

(b) The parties hereto hereby acknowledge and agree that the Easements, rights and provisions as set forth in this Agreement establish a basis for mutual and reciprocal use and enjoyment of such Easements, rights and provisions and as an integral and material consideration for the continuing right to such use and enjoyment each party hereto does hereby accept, agree to assume the burden of, and to be bound by each and every of the covenants entered into by them in this Agreement.

82 The applications judge concluded as follows (at para. 39, p. 679):

In my view, the language of that section makes it clear that the payment of interim costs, as one of the covenants in the reciprocal agreement, was intended to be a condition upon which the other easements were conveyed. The provision does not support Amberwood's submission that the cost-sharing obligations should be viewed as distinct from the scheme for mutual easements. To the contrary, paragraph 13.1(b) seems to envision a building project in which the owners would share costs in exchange for shared access and ownership. To undermine this clear intention by severing the cost obligations from the overall deal would amount to dismantling part of an intricate, complex, and well-planned scheme, and defeating legitimate party expectations.

83 In the result, the applications judge held that the conditional grant exception would apply to this case but that its adoption was also barred by the present state of the jurisprudence.

84 In my view, the applications judge's observation that the "conditional grant" exception "is essentially a form of the benefit/burden doctrine" accurately describes the position taken by DCC 123 in this case and, in turn, leads me to the conclusion that this second argument must fail, essentially for the same reasons that I have rejected the first exception.

85 I note at the outset that the principle from Halsbury's Laws of England relied upon by the applications judge seems to me to be consonant with the rule in Austerberry. I repeat it here for convenience:

If the facts establish that the granting of a benefit or easement was conditional on assuming the positive obligation, then the obligation is binding. Where the obligation is framed so as to constitute a continuing obligation upon which the grant of the easement was conditional, the obligation can be imposed as an incident of the easement itself, and not merely a liability purporting to run with the land. [Emphasis added.]

86 Hence, as a matter of construction of the creating instrument itself, if a grant of benefit or easement is framed as conditional upon the continuing performance of a positive obligation, the positive obligation may well be enforceable, not because it would run with the land, but because the condition would serve to limit the scope of the grant itself. In effect, the law would simply be giving effect to the grant. Indeed, as discussed earlier in this judgment at paragraphs 30 and 31, much the same reasoning underlies the law of restrictive covenants.

87 However, none of the grants of benefit or easement contained in the Reciprocal Agreement are framed in this way. Neither section 2.3 nor Article 3 of the Reciprocal Agreement is expressed to be conditional or dependant upon performance of all obligations under section 2.9. Further, it is my view that section 13.1(b) is far too general to create a conditional grant within the meaning of the principle stated in Halsbury's Laws of England. At its highest, it can be said that the parties to the Reciprocal Agreement have attempted to write in, as a term of their agreement, essentially the same general benefit and burden principle, the adoption of which was urged upon this court as a first exception to the rule. In my view, section 13.1(b) achieves no more, and its application would give rise to the same difficulties that I have discussed earlier. The attempt to create a contractual exception to the rule in Austerberry, while binding on the original parties to the Reciprocal Agreement, cannot displace the rule that positive covenants do not bind successors-in-title. It is undisputed in English and Canadian law that the rule that positive covenants do not – 102 – run with the land governs despite any express intention to the contrary contained in the agreement. Indeed, if the applications judge was correct in his conclusion that section 13.1(b) effectively created an exception to the rule, it would be open to anyone to simply abolish the rule at the stroke of a pen. All that would be required would be a general statement of intent that the continuing right to the use and enjoyment of all the benefits in an agreement was conditional upon the acceptance of the burden contained in any of the covenants. The recognition of such a wide exception would constitute a profound change in the law.

88 Hence, in the circumstances of this case, I would not give effect to this second ground of appeal. I would conclude that Amberwood is not bound to pay the interim expenses on the basis of the positive covenant contained in the Reciprocal Agreement.

DISPOSITION

89 For these reasons, I would conclude that the applications judge was correct in granting Amberwood's application and I would dismiss the appeal with costs. In order to comply with the rule that now requires this court to fix costs, Amberwood is to file a bill of costs and written submissions with the court within 10 days from the release of this court's decision, DCC 123 is to respond in writing within a further 10 days after filing, and a reply may be submitted within 5 days thereafter.

MacPherson J.A. (dissenting):

(1) Introduction

90 I have had the benefit of reading the reasons of my colleague, Charron J.A. I agree with her that it would be inappropriate for this court to abolish the rule in Austerberry v. Oldham (1885), 29 Ch. D. 750 (Eng. C.A.) ("Austerberry"). I also agree with her that the application judge, Stinson J., erred in holding that the doctrine of stare decisis precluded him from adopting the English 'exceptions' to the rule in Austerberry.

91 However, with respect, I do not agree with my colleague's analysis or conclusions relating to the benefit- burden and conditional grant exceptions to the rule in Austerberry. In my view, both exceptions should be adopted into the law of Ontario. Their application in this case would result in the appeal being allowed.

(2) Reform of common law principles and the role of the judiciary

92 The application of the rule in Austerberry to the present case would require that the appeal be dismissed. Amberwood would have no obligation to pay its share of the interim costs relating to water treatment, air conditioner maintenance and an on site security guard set out in section 2.9 of the Reciprocal Easement and Cost Sharing Agreement.

93 The question that arises, however, is whether the rule in Austerberry is, or should be, an absolute rule or whether it should admit of exceptions? In my view, it is important to address the topic of whether the law of real property in Ontario should recognize certain qualifications on, or exceptions to, the rule in Austerberry. I say this for several reasons.

94 First, the original historical rationales for the rule in Austerberry are simply not as relevant in Ontario in 2002 as they may have been in the United Kingdom in 1885. This point was succinctly summarized by the application judge in the present case:

The 1989 Ontario Law Reform Commission Report on Covenants Affecting Freehold Land at 21 considered the rule against positive covenants flowing with title and the two reasons typically advanced for its existence. First, such covenants tended to render land inalienable. Second, persons dealing subsequently with the land would have great difficulty ascertaining the existence of such covenants, because they do not normally have a physical manifestation.

The OLRC considered and rejected these rationales. The OLRC Report noted at 100 that it has now been generally recognized that such restrictions do not render land inalienable. Rather, both positive and negative covenants tend to enhance alienability, since they operate to protect the amenities of neighbourhoods and competitiveness of businesses. The second rationale that gave rise to the ancient rule has never been an obstacle in Ontario, since a system of land registration has existed since the province was created.

95 A similar observation on the inalienability aspect of the rationale for the rule in Austerberry was made by Cambridge University law professor Kevin Gray in his text, Elements of Land Law (2nd. ed., 1993), at pp. 1133-34:

Although the principle of Austerberry v. Oldham Corpn was clearly motivated by a policy that land should remain unfettered for future generations, the implications of that decision are nowadays a matter of considerable – 103 – disadvantage. It has been pointed out, for instance, that the principle 'impedes transactions in land which have become socially desirable'. The anxiety of judges in the 19th century to limit the kinds of incumbrance which might be imposed upon the freehold estate is not particularly apposite under the vastly changed conditions of modern life where most people live in large cities. The property law of the 19th century was highly individualistic and made little provision for 'freeholders living like battery hens in urban developments' where much of the land area may consist of amenities which belong to none personally but which are socially necessary for all.

96 Second, the rule in Austerberry is simply too harsh if it is applied in all cases. In a comprehensive study of all aspects of the law relating to covenants entitled Transfer of Land: The Law of Positive and Restrictive Covenants (1984), The Law Commission of the United Kingdom stated, at p. 19:

The greatest and clearest deficiency in the law . . . is that the burden of a positive covenant entered into between nearby landowners does not in any circumstances run with the land of the covenantor. [Emphasis added.]

In a similar vein, Professors Bradbrook, MacCallum and Moore, the authors of the leading text Australian Real Property Law (2nd. ed., 1997), have described the rule in Austerberry as "inflexible" and have documented a number of methods for "avoid[ing] the severity of the rule" (pp. 18-6 - 18-7).

97 Third, in most common law jurisdictions where the rule in Austerberry applies there has been substantial modification of the rule by legislatures. This is particularly so in the relatively new and rapidly growing domain of condominiums: see Ziff, Principles of Property Law (3rd. ed., 2000) at p. 366. Indeed, in Ontario, as Charron J.A. points out in her reasons, there are now at least twelve statutes that derogate from the application of the rule in Austerberry in certain situations.

98 Amberwood contends that the existence of these statutory exceptions implies that the legislature has endorsed the rule in Austerberry in all other situations, including the situation in this case. I disagree. The more logical interpretation, in my view, is that the legislature has on occasion dealt with discrete problems presented by the "inflexible" and "severe" rule. The legislature's solutions to those problems are not a warning to the courts that they should abdicate their traditional role as interpreters and developers of the common law in this domain.

99 Fourth, and related to the previous point, the rule in Austerberry is a common law rule created by the courts in the United Kingdom and adopted by courts in other jurisdictions, including Canada: see Parkinson v. Reid, [1966] S.C.R. 162 (S.C.C.). I see no reason why the courts should not regard it as their function to assess, in a principled way, whether the rule should apply in every case and to consider whether exceptions need to be developed to deal with unforeseen situations or cases where the strict application of the rule would lead to injustice. That process is the essence of the common law. As Justice Cardozo said in The Nature of the Judicial Process (1921), the book flowing from the Storrs Lectures delivered at Yale University: "There are gaps to be filled. There are doubts and ambiguities to be cleared. There are hardships and wrongs to be mitigated if not avoided" (p. 14).

100 Having concluded that it is appropriate for the courts to address the issue of exceptions to the rule in Austerberry, the question becomes: what are the possible exceptions and should any of them be applied in the present case? In the last half-century, the case law in the United Kingdom has provided two possible exceptions - the benefit-burden exception and the conditional grant exception. I will consider them in turn.

(3) The benefit-burden exception

101 The benefit-burden exception is easy to state - "he who takes the benefit of the transaction must also bear the burden": see Tito v. Waddell, [1977] Ch. 106 (Eng. Ch. Div.) at 289, per Megarry V.-C. The benefits and burdens can arise out of entirely separate obligations. As explained by Professor Ziff in Positive Covenants Running With Land: A Castaway on Ocean Island?[FN2] (1989), 27 Alta. L. R. 354 at 356 ("Positive Covenants"):

The principle of benefit and burden applies where, as a matter of construction, the benefits and burdens are created as independent obligations, for a central feature of the doctrine is to tether previously separate promises.

102 The first case in which the benefit-burden exception was applied was Halsall v. Brizell (1956), [1957] 1 All E.R. 371 (Eng. Ch. Div.) ("Halsall"). In that case, the purchasers of lots in a subdivision were entitled under a trust deed to use private roads and other amenities. Each purchaser covenanted to pay a share of the costs to maintain the amenities. This is a classic positive covenant squarely within the rule in Austerberry.

103 The court held that the successors to the original covenantors were liable to pay their share of the costs. Upjohn J. was well aware that he was dealing with positive covenants. He observed that the successors could not be sued on the covenants in the original deed because "a positive covenant . . . does not run with the land" (p. 377). However, he continued, at p. 377: – 104 –

It is, however, conceded to be ancient law that a man cannot take benefit under a deed without subscribing to the obligations thereunder. If authority is required for that proposition, I refer to one sentence during the argument in Elliston v. Reacher, [1908] 2 Ch. 665, where Sir Herbert Cozens-Hardy, M.R., said, at p. 669:

It is laid down in Coke on Littleton, 230b, that a man who takes the benefit of a deed is bound by a condition contained in it though he does not execute it.

If the defendants did not desire to take the benefit of this deed, for the reasons that I have given they could not be under any liability to pay the obligations thereunder. They do desire, however, to take the benefit of this deed. They have no right to use the sewers which are vested in the plaintiffs, and I cannot see that they have any right, apart from the deed, to use the roads of the park which lead to their particular house, No. 22, Salisbury Road . . . Therefore, it seems to me that the defendants here cannot, if they desire to use their house, as they do, take advantage of the trusts concerning the user of the roads contained in the deed and the other benefits created by it without undertaking the obligations thereunder. On that principle it seems to me that they are bound by this deed, if they desire to take its benefits.

104 The analysis and result in Halsall were almost immediately acclaimed in important quarters. An editorial note annexed to the report of the case in the All England Law Reports said that the conclusion was supported by two legal maxims, the Latin maxim qui sentit commodum sentire debet et onus (he who receives the advantage ought also to suffer the burden) and the Scottish rule that one cannot both approbate and reprobate (p. 372). Favourable case comments by Professor H.W.R. Wade and Robert Megarry appeared in, respectively, , [1957] C.L.J. 35 and (1957), 73 L.Q.R. 154. Professor Wade wrote that "[i]n Halsall v. Brizell . . . a method seems to have been found for making the burden of a positive covenant run with land very effectively" (p. 35). In the latter comment, Mr. Megarry concluded, at p. 156:

What plainly would be unjust would be to allow the successors in title to rely on only those portions of the covenants which benefit them, and reject the rest, just as a legatee must accept or reject a legacy as a whole, and not accept the beneficial part and disclaim the remaining burdensome parts: see, e.g. Re Joel, [1943] Ch. 311. Halsall v. Brizell is plainly an important decision of which more will be heard. Those concerned with the development of estates, and perhaps especially those who frame schemes for freehold flats, now have at their disposal a flexible means of enforcing control against successors in title even in matters of positive obligation.

105 Halsall was applied, and extended to parol agreements, in E.R. Ives Investment Ltd. v. High (1966), [1967] 1 All E.R. 504 (Eng. C.A.) ("Ives Investments"). In that case, the plaintiffs' predecessor in title, Mr. Westgate, and the defendant, Mr. High, bought adjacent building sites. The foundations of Westgate's building trespassed under High's land. Because Westgate and High were, in Danckwert L.J.'s words, "sensible and reasonable neighbours" (p. 509), they discussed the situation and reached an agreement - Westgate's foundation could stay in place and High would have access across Westgate's yard to a side street. High used Westgate's yard for his car, built a garage on his property which could only be accessed from Westgate's yard, and even paid a portion of the costs of re-surfacing Westgate's yard. Eventually, Westgate's property passed into the hands of E.R. Ives Investments Ltd. which challenged High's right of way and sought an injunction restraining High from exercising his right of way across the passage. The trial judge refused the injunction.

106 On appeal to the Court of Appeal, all three judges delivered reasons. All cited Halsall with approval. Lord Denning said, at p. 507:

When adjoining owners of land make an agreement to secure continuing rights and benefits for each of them in or over the land of the other, neither of them can take the benefit of the agreement and throw over the burden of it. This applies not only to the original parties, but also to their successors. The successor who takes the continuing benefit must take it subject to the continuing burden. This principle has been applied . . . to purchasers of houses on a building estate who had the benefit of using the roads and were subject to the burden of contributing to the upkeep (see Halsall v. Brizell . . .). The principle clearly applies in the present case. The owners of the block of flats have the benefit of having their foundations in the defendant's land. So long as they take that benefit, they must shoulder the burden. They must observe the condition on which the benefit was granted, namely, they must allow the defendant and his successors to have access over their yard . . . Conversely, so long as the defendant takes the benefit of the access, he must permit the block of flats to keep their foundations in his land.

Leave to appeal to the House of Lords was refused.

107 The third and, without question, the leading English case applying the benefit-burden principle is Tito v. Waddell, supra, ("Tito"). Tito is a case on a grand scale. The trial lasted 111 days in 1975, 98 days in 1976 and 3 days in 1977. The judgment written by Vice-Chancellor Megarry (who, as Mr. Megarry, had written the favourable case comment on Halsall 20 years earlier) was 241 pages in the law report and took four days to read in open court. – 105 –

108 The facts in Tito are from another age and reveal, in Professor Ziff's words, "a measure of corporate and imperial avarice": see Positive Covenants, at p. 355. In 1900, phosphate was discovered on Ocean Island. The island was called Banaba by the inhabitants who were known as Banabans. In the same year, the island became a British settlement. The land on Ocean Island was divided up into a large number of small plots (most of them being less than one acre) owned by individual Banabans or groups of Banabans. A British company was given a licence to mine the phosphate on the island. In 1913, an agreement was reached among the mining company, the Colonial Office, the resident Commissioner and the landowners. The mining company acquired mining rights in return for the payment of certain sums to the landowners and royalties to the government. The agreement also provided that after all the phosphate was removed from the land, the worked-out lands would be returned to the original owners. The company was required by the agreement to "replant such lands - whenever possible - with coconuts and other food- bearing trees, both in the lands already worked out and in those to be worked out".

109 In 1920, the governments of the United Kingdom, Australia and New Zealand purchased the undertakings of the mining company on Ocean Island and the rights over the mining operations were vested in three Phosphate Commissioners (one from each country). In 1971, a group of Banabans, including Rotan Tito, filed suit against the current Commissioners, seeking performance of the replanting obligation which had become due.

110 The replanting obligation was a positive covenant; it would have required the Commissioners to spend more money to comply with it. Thus, if the rule in Austerberry applied, the Commissioners, successors to the original covenantors, could not be forced to fulfil the replanting obligation.

111 Megarry V.-C. was not prepared to accept such a result. He engaged in an extensive analysis of "the principle that he who takes the benefit of a transaction must also bear the burden" (p. 289). He divided the principle into two categories, conditional benefits and "the pure principle of benefit and burden" (p. 290). He described, and differentiated between, these two categories in this fashion, at p. 290:

CONDITIONAL BENEFITS AND INDEPENDENT OBLIGATIONS. One of the most important distinctions is between what for brevity may be called conditional benefits, on the one hand, and on the other hand independent obligations. An instrument may be framed so that it confers only a conditional or qualified right, the condition or qualification being that certain restrictions shall be observed or certain burdens assumed, such as an obligation to make certain payments. Such restrictions or qualifications are an intrinsic part of the right: you take the right as it stands, and you cannot pick out the good and reject the bad. In such cases it is not only the original grantee who is bound by the burden; his successors in title are unable to take the right without also assuming the burden. The benefit and the burden have been annexed to each other ab initio, and so the benefit is only a conditional benefit. In the other class of case the right and the burden, although arising under the same instrument, are independent of each other: X grants a right to Y, and by the same instrument Y independently covenants with X to do some act. In such cases, although Y is of course bound by his covenant, questions may arise whether successors in title to Y's right can take it free from the obligations of Y's covenant, or whether they are bound by them under what for want of a better name I shall call the pure principle of benefit and burden.

112 Megarry V.-C. engaged in an extensive analysis of many authorities and dealt openly with the perceived problems of the benefit-burden principle in a real property context. In particular, he discussed at length Halsall which he regarded as the leading case in the pure principle of benefit and burden category. He was well aware of the criticisms that had been made of Halsall - that Upjohn J.'s conclusion on the benefit-burden issue was obiter, was based on a concession by counsel, and involved reliance on a comment during argument (not a decision) by a judge (Cozens-Hardy M.R.) in a previous case.

113 In spite of these difficulties concerning Halsall, in the end Megarry V.-C. clearly approved of it. He concluded, at p. 295:

Let it be accepted that a degree of historical frailty can be detected in the forensic process in this sphere, and let it also be accepted that, at any rate on one view, what Upjohn J. said on the point was not necessary for his decision and forms no part of his ratio decidendi. Accept all that, and there still remains the fact that, quite apart from other authorities, the propositions enunciated by Cozens-Hardy M.R. and Upjohn J. seemed right to them. Couple that with the simple principle of fairness and consistency that I have mentioned, and it will be seen that there is good reason why I should be ready to adopt and apply the broader proposition that has emerged from the technicalities of past ages.

114 Applying "the broader proposition" or "the pure principle of benefit and burden", Megarry V.-C. held that the current Commissioners had an obligation to comply with the replanting covenant. They had received, and exercised, the benefit of substantial mining rights. The burden of replanting needed, therefore, to be respected. – 106 –

115 The trilogy of Halsall, E.R. Ives Investment Ltd., and Tito created a solid foundation in English law for a benefit-burden exception to the rule in Austerberry. However, blunt and strong judicial criticism of the trilogy, especially Tito, was not long in coming.

116 By far the strongest criticism came in an Australian case, Government Insurance Office v. K.A. Reed Services Pty. Ltd., [1988] V.R. 829 (Australia Full Ct.) ("Reed Services"). Although that case could have been resolved on the basis that the successor to a positive covenant had no notice of it ("The appellant, being entirely ignorant of the agreement, could not be said to be taking its benefit": p. 841), the full court, speaking through Brooking J., went out of its way to reject the benefit-burden exception. Brooking J. criticized the legal pedigree, namely Halsall , of the pure principle of benefit and burden, expressed concerns about the limits of the principle, called it "a mere maxim masquerading as a rule of law, false and misleading . . . when read literally" (p. 841) and concluded, at pp. 840-41:

I am, with the greatest respect, unable to accept that there exists a principle of benefit and burden, whether as formulated by Megarry V.-C. [Tito] or as laid down either by Lord Denning M.R. or by Danckwerts L.J. [Ives Investments] . . . It confounds the law relating to covenants affecting land.

. . . . .

I have dealt at some length with the law on this subject because of my impression that the "pure principle" now bids fair to entrench itself in our jurisprudence and because of my clear view that it must, in the interests of certainty and sound doctrine, be repelled.

117 A less lengthy (indeed it is only a single paragraph) but nevertheless important (because of its source) critique of Tito and the benefit-burden exception to the rule in Austerberry is contained in Rhone v. Stephens, [1994] 2 All E.R. 65 (U.K. H.L.) ("Rhone"). In that case, in 1960 the owners of a house and an adjoining cottage, which were under the same roof, sold the cottage. In the conveyance, the vendor covenanted for himself and his successors in title as the owners of the house to maintain that part of the roof of the house which was above the cottage in good condition to the reasonable satisfaction of the purchasers and their successors in title. Since 1960 both properties had been sold. In 1986, the plaintiffs, who then owned the cottage, brought an action against the defendant claiming that the roof above the cottage was leaking and that the defendant was in breach of the covenant to repair the roof.

118 The House of Lords rejected the plaintiffs' position. The law lords expressly affirmed the rule in Austerberry. In a single paragraph, the court, speaking through Lord Templeman, considered the plaintiffs' submission that the defendant, who had the benefit of the shared roof, should be required to bear the burden of repairing the roof pursuant to the covenant on the basis of the benefit-burden exception. Lord Templeman said, at p. 73:

Mr. Munby also sought to persuade your Lordships that the effect of the decision in the Austerberry case had been blunted by the 'pure principle of benefit and burden' distilled by Megarry V-C from the authorities in Tito v Waddell (No 2) [1977] 3 All ER 129 at 291-292, [1977] Ch 106 at 301-303. I am not prepared to recognise the 'pure principle' that any party deriving any benefit from a conveyance must accept any burden in the same conveyance. Megarry V- C relied on the decision of Upjohn J in Halsall v. Brizell, [1957] 1 All E.R. 371, [1957] Ch. 169. In that case the defendant's predecessor in title had been granted the right to use the estate roads and sewers and had covenanted to pay a due proportion for the maintenance of these facilities. It was held that the defendant could not exercise the rights without paying his costs of ensuring that they could be exercised. Conditions can be attached to the exercise of a power in express terms or by implication. Halsall v. Brizell was just such a case and I have no difficulty in whole- heartedly agreeing with the decision. It does not follow that any condition can be rendered enforceable by attaching it to a right nor does it follow that every burden imposed by a conveyance may be enforced by depriving the covenantor's successor in title of every benefit which he enjoyed thereunder. The condition must be relevant to the exercise of the right. In Halsall v. Brizell there were reciprocal benefits and burdens enjoyed by the users of the roads and sewers. In the present case cl 2 of the 1960 conveyance imposes reciprocal benefits and burdens of support but cl 3 which imposed an obligation to repair the roof is an independent provision. In Halsall v. Brizell the defendant could, at least in theory, choose between enjoying the right and paying his proportion of the cost or alternatively giving up the right and saving his money. In the present case the owners of Walford House could not in theory or in practice be deprived of the benefit of the mutual rights of support if they failed to repair the roof.

119 In my view, this is a surprising paragraph, for two reasons. First, it begins with a blunt rejection, without reasons, of the pure principle of benefit and burden. The lack of analysis by the House of Lords is surprising in light of the comprehensive, and fairly presented, discussion of the principle in Tito: see N. P. Gravells, Enforcement of Positive Covenants Affecting Freehold Land (1994), 110 L.Q.R. 346 at 349 ("[Lord Templeman's] formulation of the pure principle does not fairly represent the extensive discussion in Tito v. Waddell (No. 2)"). Second, the House of Lords appears to expressly approve of the conditional grant exception to the rule in Austerberry. Moreover, the law lords' approval flows directly from its "whole-hearted" agreement with Halsall. This is also surprising because in Tito – 107 –

Megarry V.-C. had described Halsall as the genesis of the pure principle of benefit and burden, not as an example of the conditional grant exception.

120 Against this background of the case law, I turn to the academic commentary on the benefit-burden exception to the rule in Austerberry. The commentary has been recently, just as it was immediately after Halsall in 1957 (see comments by Megarry, supra, and Wade, supra), largely complimentary. Leading scholars express concerns about the antecedents of the exception (especially some of Upjohn J.'s reasoning in Halsall), the factors to be taken into account in analyzing benefit and burden, and the reach and implications of the exception. However, in the end most scholars think that the benefit-burden exception plays a useful role in real property law.

121 Professor Bruce Ziff, a leading Canadian property law scholar, in his comprehensive and excellent article Positive Covenants, favoured the analysis in Tito to that in Reed Services and concluded, at p. 372:

[I]ncremental adjustments through the caselaw should not be regarded with surprise or dismay. There are no compelling reasons why the schemes sought in Reed Services and Tito should not be regarded as permissible as an ordinary incident of private property ownership. In both cases, allowing affirmative burdens to run with land would have enabled the parties to meet their intended objectives in a straightforward and inexpensive fashion.

122 Professor E.P. Aughterson, an Australian scholar who has written extensively on property law, also favoured the analysis in Tito to that in Reed Services. In the concluding section of his article In Defence of the Benefit and Burden Principle (1991), 65 A.L.J. 319 at 331, he said:

It has been suggested, above, that the scope of the benefit and burden principle is sufficiently clear to allow its application with a reasonable degree of precision and that other principles are not a bar to its adoption. Rather, various devices, such as chains of indemnities, restrictive covenants, estoppel and rent charges, as well as the benefit and burden principle, have evolved in order to meet the unsatisfactory consequences of the rule that the burden of positive covenants does not run with the land. None of these devices, in themselves, provide a comprehensive solution. The benefit and burden principle is no exception. It operates only where a benefit can be given and continues only while the benefit is sufficiently valuable for the covenantor's successor to continue to claim it. Nevertheless, it is another weapon in an armoury which might be used to militate against a common law rule which can operate unfairly in some instances.

123 In the United Kingdom, Professor Christine Davis has recently written a thoughtful article, The Principle of Benefit and Burden (1998), 57 C.L.J. 522. The value of this article is that Professor Davis considers a wide variety of applications of the benefit-burden principle in several areas of private law, including real property. She deals extensively with objections to the pure principle of benefit and burden and concludes that they "relate largely to the fact that its limits are unclear and that it has potentially far-reaching effects" (p. 548). However, in the end Professor Davis emerges as a strong supporter of the principle of benefit and burden and of its leading case authorities in the real property domain, Halsall and Tito. She concludes, at pp. 552-53:

It is arguable that "benefit and burden" is a principle, reasonably clear in its application, that promotes fairness and, consequently, far greater use should be made of it. It seems only fair that a right or benefit originally granted subject to a condition or linked with a reciprocal right or obligation should remain conditional or linked. In recent years the courts have been keen to make use of other principles that can be seen to achieve fairness in the circumstances and in the light of the conduct of the parties, such as constructive trusts and proprietary estoppel. For example, a purchaser of land may be bound by means of a constructive trust by a contractual licence or unregistered registrable interest where his conscience is affected because of the circumstances surrounding the assignment. Why should his conscience not also be affected by the circumstances of the grant, at least where he has knowledge of them, combined with his later conduct in taking the benefit? Perhaps the only justifiable distinction between the principle of benefit and burden on the one hand and the constructive trust and doctrine of proprietary estoppel on the other hand is that the latter are discretionary in their application or effects whereas the former is not. Nevertheless, provided that the courts reach a satisfactory conclusion in relation to issues such as the need for knowledge so as to ensure that the principle of benefit and burden is fair to all concerned, it is arguable that the principle of benefit and burden is a useful doctrine which should be invoked by the courts whenever the circumstances permit.

124 Based on this review of the leading case authorities and some of the academic and professional commentary, the question becomes: should the principle of benefit and burden be adopted in Ontario as an exception to the rule in Austerberry?

125 I begin by noting that, in my view, it is open to Canadian courts to adopt the benefit-burden exception if they think it has merit. In a real property context, the exception has not been rejected by any appellate court. Indeed, the exception and its originating case, Halsall, were mentioned by Cartwright J. in Parkinson v. Reid. In that case, the court affirmed the general rule that positive covenants do not run with the land. Accordingly, the successor in title – 108 – to a covenant requiring repair of a stairway was not obligated to comply with the covenant. However, Cartwright J. observed, at pp. 168-69:

Assuming that so long as the appellants made use of the last-mentioned wall as a party wall they were bound to keep the stairway in repair, they ceased to be under any such obligation when they no longer made use of the respondent's wall. It is not suggested that the appellants have made any use of that wall since their building was destroyed by fire. A case in which this principle was applied is Halsall v. Brizell. . . .

126 Turning to the fundamental question, I can state my view that the benefit-burden exception to the rule in Austerberry should be adopted. I believe that the analysis in Halsall, E.R. Ives Investment Ltd. and Tito is preferable to the analysis in Reed Services and Rhone. I also find persuasive the strong academic and professional support for the exception, extending from Professor Wade and Mr. Megarry in 1957 to Professor Aughterson in Australia, Professor Davis in the United Kingdom and Professor Ziff in Canada in recent years.

127 The final question then becomes: is the exception applicable in this case? I begin my answer to this question by noting that all of the judges and academics who favour the exception admit that there are problems with it. In Tito, Megarry V.-C. was particularly candid on this point. He began the summary of his conclusions with this sentence: "I emerge from a consideration of the authorities put before me with a number of conclusions and a number of uncertainties" (p. 302).

128 In spite of problems and uncertainties, in my view it is possible, based on the case authorities and the academic commentary, to state the components of the benefit-burden exception with a reasonable degree of clarity.

129 First, the assignee of a positive covenant must have notice of it. The burden of such a covenant cannot attach to a person who was not aware of it. That will rarely be an issue in Ontario where a wide variety of documents relating to land can be registered and are thus accessible.

130 Second, a positive covenant which imposes a burden on an assignee must be accompanied by a benefit. The burden will not run in isolation.

131 Third, it may be that there is some type of qualitative threshold in the benefit and burden analysis. Megarry V.-C. seemed to envisage one because in Tito he said, at p. 305:

I do not think that the pure benefit and burden principle is a technical doctrine, to be satisfied by what is technical and minimal. I regard it as being a broad principle of justice, to be satisfied by what is real and substantial.

See also: Ziff, Positive Covenants, at p. 357.

132 Fourth, there need not be a direct relationship or linkage between the benefit and the burden. They are, as Megarry V.-C. said in Tito , "independent" (p. 290), which distinguishes them from conditional benefits (discussed below).

133 Fifth, the assignee must be able to exercise a choice about assuming the benefits and burdens. This was one of the fundamental components of the exception described by Upjohn J. in Halsall (p. 377). It should be recalled that Halsall was specifically approved in Rhone, although the approval is surprising and confusing in light of the House of Lords' rejection of Tito ; on the issue of choice or election, Lord Templeman said: "In Halsall v. Brizell the defendant could, at least in theory, choose between enjoying the right and paying his proportion of the cost or alternatively giving up the right and saving his money" (p. 73).

134 Turning to the application of these factors in the present case, it is clear that they line up in favour of the appellant.

135 Amberwood had clear notice of the burdens which it would be required to assume. Indeed, before the litigation was commenced, there were extensive negotiations about the burdens and, at one point, Amberwood's counsel informed DCC's counsel, in a letter dated October 1, 1999, "I have advised my clients and they have agreed with me to accept that they are bound by the terms of the agreement".

136 In addition, there can be little question that Amberwood derived benefits from the agreement and that, on any standard, the benefits are "real and substantial". The recreational and utility units in DCC's building, which are partly owned by Amberwood, are maintained by DCC. There is 24 hour security for that building. Amberwood also has the benefit of 10 valuable easements provided for in section 3.1 of the agreement.

137 Finally, Amberwood exercised a clear choice when it accepted the benefits under the agreement. It has never disclaimed its entitlement to the benefits; indeed it has openly asserted that entitlement and an intention to – 109 – use the benefits, including "for [Amberwood's] future marketing program" (Price-Kilgour letter, September 24, 1999).

138 In summary, I would apply the benefit-burden exception to the rule in Austerberry in the present case. Since Amberwood had notice of the burdens, since the benefits are "real and substantial", and since Amberwood elected to accept them, it must also accept the burden of paying its share of the interim costs.

139 Before leaving this issue, which I acknowledge is a difficult one, I want to make two final observations.

140 First, I do not think there is an inconsistency between the introduction of the benefit-burden exception into the law of Ontario and the continuation of the general rule that positive covenants do not run with the land. Put another way, I do not think that the exception swallows the rule. Professor Davis, in her article The Principle of Benefit and Burden, stated that with respect to the "pure principle of benefit and burden . . . [e]nforcement is only possible in certain circumstances, not generally" (p. 552). The Ontario Law Reform Commission, in its Report on Covenants Affecting Land (1989), said that the usefulness of the exception in Halsall "is somewhat limited. It will operate only if there is a benefit to be claimed under the deed, and further, it will operate only so long as the assignee of the covenantor continues to claim that benefit" (p. 23). Professor Eileen Gillese, in her text Property Law (2nd. ed., 1990), made a similar observation: "The doctrine in Halsall v. Brizell . . . is of limited application, however, since it only applies if the assignees claim or use the benefit" (p. 20:10).

141 I agree with these comments. The exception will not apply if there is no notice of the burden or if there is no benefit for the assignee to receive or if the assignee elects not to accept the benefit. These are important factors; their presence will allow the general rule to continue to be applied in many appropriate cases.

142 Second, I do not think that the benefit-burden exception will hinder the alienability of land. Market forces will deal with the exception, just as they deal with all other relevant factors in a purchase and sale context. As explained by Professor Ziff in Positive Covenants, "market forces will take account of, and respond to, the effect of positive covenants on alienation: if a covenant renders a property less desirable, its price will fall until it again becomes attractive to purchasers" (p. 369). Moreover, in many situations, especially large scale development projects, the exception will be viewed by the contracting parties as highly desirable because it will promote alienability: see Ontario Law Reform Commission, Report on Covenants Affecting Freehold Land, at p. 100, and Gray, Elements of Land Law, at pp. 1133-34.

(4) The conditional grant exception

143 The conditional grant exception to the rule in Austerberry was succinctly explained by Megarry V.-C. in Tito, at p. 290. For ease of reference, I set out this passage again:

An instrument may be framed so that it confers only a conditional or qualified right, the condition or qualification being that certain restrictions shall be observed or certain burdens assumed, such as an obligation to make certain payments. Such restrictions or qualifications are an intrinsic part of the right: you take the right as it stands, and you cannot pick out the good and reject the bad. In such cases it is not only the original grantee who is bound by the burden: his successors in title are unable to take the right without assuming the burden. The benefit and the burden have been annexed to each other ab initio, and so the benefit is only a conditional benefit.

144 I begin by observing that I think the case for importing this exception into Ontario law is even stronger than the case for importing the benefit-burden exception. I acknowledge that there is uncertainty about the existence of the benefit-burden exception in English law in light of the House of Lords' terse disapproval of it in Rhone. Nevertheless, I would import it into Ontario law because I think it will make the law of real property more just.

145 As for the conditional grant exception, on my reading of the cases, it is accepted in English law. There is no uncertainty concerning its existence. The reason for the certainty on this point is that in Rhone the law lords expressly approved of the result in Halsall and, perhaps surprisingly, explained Halsall as an example of the conditional grant category. Accordingly, the question in this aspect of the appeal is whether an accepted principle in English law should become part of the law of Ontario? For the reasons in the previous section, I would answer this question in the affirmative.

146 It remains to determine whether the conditional grant exception applies in the present case. In my view, it does apply.

147 I begin by noting the title of the governing document, the Reciprocal Easement and Cost Sharing Agreement. This title suggests, in my view, a direct linkage between the benefits of the easements and the burden of cost sharing. – 110 –

148 The preamble to the agreement also explicitly links easements and cost sharing:

AND WHEREAS the [owners] are entering into this Agreement to provide, without limitation, for . . . the sharing of responsibilities and costs for mutual services . . . and . . . the Easements required by each of the parties . . . .

149 Sections 3.1 and 3.2 of the agreement then set out an extensive list of highly valuable easements - 10 in favour of Amberwood's predecessor and four in favour of DCC. Amberwood's easements include rights of access to permit construction of Phase 2, rights of access for purposes of maintenance, repair, installation and vehicular and pedestrian movement, and rights to tap into existing facilities in the Phase 1 building.

150 Crucially, s. 13.1(b) of the agreement provides:

Section 13.1 - Provisions Run with the Land

. . . . .

(b) The parties hereto hereby acknowledge and agree that the Easements, rights and provisions as set forth in this Agreement establish a basis for mutual and reciprocal use and enjoyment of such Easements, rights and provisions and as an integral and material consideration for the continuing right to such use and enjoyment each party hereto does hereby accept, agree to assume the burden of, and to be bound by each and every of the covenants entered into by them in this Agreement.

151 The application judge interpreted s. 13.1(b) in this fashion:

In my view, the language of that section makes it clear that the payment of interim costs, as one of the covenants in the reciprocal agreement, was intended to be a condition upon which the other easements were conveyed. The provision does not support Amberwood's submission that the cost-sharing obligations should be viewed as distinct from the scheme for mutual easements. To the contrary, paragraph 13.1(b) seems to envision a building project in which the owners would share costs in exchange for shared access and ownership. To undermine this clear intention by severing the cost obligations from the overall deal would amount to dismantling part of an intricate, complex, and well-planned scheme, and defeating legitimate party expectations.

152 I agree with this analysis. In my view, it is clear from a reading of the entire agreement - its title, preamble and substantive provisions - that there is a direct and intentional linkage or reciprocity between the benefits of the easements, which are numerous and valuable, and the burden of the interim costs that are in issue in this appeal. Accordingly, since Amberwood had notice of the burdens and elected to accept the benefits (even though their full value will not be realized until Amberwood either builds Phase 2 or sells the land, presumably for a price that would reflect the benefits of the easements), it must also accept the linked burden of paying its share of the interim costs.

(5) Conclusions and Disposition

153 This is a difficult case, in terms of both the proper role of the courts in changing the common law and the substantive law of real property.

154 I agree with my colleague, Charron J.A., that abolition of the rule in Austerberry must come, if it comes at all, through legislation. I also agree with my colleague's thoughtful reasons in support of this conclusion.

155 My colleague extends her reasoning to the question of whether the law of Ontario should admit of exceptions to the rule in Austerberry. I confess that there is much to be said for my colleague's reasoning on the question of exceptions.

156 However, with respect, I have reached a different conclusion on the question of exceptions. In my view, there are recognized exceptions to the rule in Austerberry in English case law. The judicial reasoning in support of the exceptions and the academic and professional commentary about that reasoning persuade me that the exceptions should be adopted as part of the common law of Ontario.

157 As to whether the courts can introduce the exceptions into the law of Ontario, I recall again what Justice Cardozo said about the role of the common law in The Nature of the Judicial Process: "There are gaps to be filled. There are doubts and ambiguities to be cleared. There are hardships and wrongs to be mitigated if not avoided" (p. 14).

158 In a similar vein, Bastarache J. recently discussed judicial reform of the common law in Friedmann Equity Developments Inc. v. Final Note Ltd. (2000), 188 D.L.R. (4th) 269 (S.C.C.), at 290-91 ("Friedmann Equity"): – 111 –

[I]t is necessary to understand the principles which govern judicial reform of the common law. In the past, this Court has considered the conditions which must be present to effect a change in the common law in several cases: [names and citations omitted]. From these cases, some general principles have emerged. A change in the common law must be necessary to keep the common law in step with the evolution of society . . . to clarify a legal principle . . . or to resolve an inconsistency. In addition, the change should be incremental, and its consequences must be capable of assessment.

[Emphasis added.]

159 Canadian society and the patterns of property ownership in 2002 are very different from English society and land ownership in 1885 when Austerberry was decided. The Ontario legislature has recognized the differences and enacted laws mitigating the rigours of the rule in Austerberry - on 12 occasions.

160 In my view, the benefit-burden and conditional grant exceptions to the rule in Austerberry can perform a similar role if introduced into the common law of Ontario. As I have tried to explain the exceptions, their adoption would, as required by Bastarache J. in Friedmann Equity, result in incremental change with consequences capable of assessment. They would also meet Justice Cardozo's important objective of mitigating hardships or wrongs in appropriate cases. This is one of those cases. The intentions of the original contracting parties and the wording in the agreement they signed are both crystal clear: a regime of reciprocal easements and other benefits and cost sharing was established. Amberwood, a successor in title to one of the contracting parties, chose, with full knowledge of the clear terms of the original agreement, to accept and utilize the benefits of the agreement. In my view, it would be unjust to permit Amberwood to ignore the reciprocal burdens which the agreement so clearly imposes on it.

161 For these reasons, I would allow the appeal with costs.

Appeal dismissed.

FN*. Additional reasons at 2002 CarswellOnt 1201 (Ont. C.A.).

FN1. Now Miller Thomson, LLP

FN2. Ocean Island is another name for Tito v. Waddell.

2002 CarswellAlta 54

2002 SCC 7, 19 B.L.R. (3d) 159, 208 D.L.R. (4th) 155, [2002] A.W.L.D. 52, 281 N.R. 113, 30 C.B.R. (4th) 168, 2002 CarswellAlta 55, 299 A.R. 1, [2002] 1 S.C.R. 146, 266 W.A.C. 1, REJB 2002-27593, J.E. 2002-230, 1 R.P.R. (4th) 1

Bank of Montreal v. Dynex Petroleum Ltd.

Bank of Montreal, Appellant v. Enchant Resources Ltd. and D. S. Willness, Respondents

Supreme Court of Canada

McLachlin C.J.C., Gonthier, Iacobucci, Major, Bastarache, Binnie, LeBel JJ.

Heard: November 9, 2001 Judgment: January 24, 2002 Docket: 27766

Proceedings: additional reasons to 2001 CarswellAlta 1461 (S.C.C.); affirming (1999), 182 D.L.R. (4th) 640, 74 Alta. L.R. (3d) 219, [2000] 2 W.W.R. 693, 2 B.L.R. (3d) 58, 15 C.B.R. (4th) 5, 15 P.P.S.A.C. (2d) 179, (sub nom. Bank of Montreal v. Enchant Resources Ltd.) 255 A.R. 116, (sub nom. Bank of Montreal v. Enchant Resources Ltd.) 220 W.A.C. 116 (Alta. C.A.); reversing (1995), 39 Alta. L.R. (3d) 66, [1996] 6 W.W.R. 461, 11 P.P.S.A.C. (2d) 291 (Alta. Q.B.); and reversing (1997), 50 Alta. L.R. (3d) 44, [1997] 6 W.W.R. 104, 31 B.L.R. (2d) 44, 46 C.B.R. (3d) 36, 145 D.L.R. (4th) 499, 202 A.R. 331, 12 P.P.S.A.C. (2d) 183 (Alta. Q.B.)

Counsel: Richard B. Jones, for Appellant – 112 –

James C. Crawford, Q.C., Frank R. Dearlove, Scott H.D. Bower, for Respondents

Subject: Natural Resources; Property; Corporate and Commercial; Insolvency

Oil and gas --- Exploration and operating agreements — Royalty agreement — General

Overriding royalty interest could, subject to intention of parties, be interest in land.

Oil and gas --- Oil and gas leases — Miscellaneous issues

Overriding royalty interest could, subject to intention of parties, be interest in land.

Pétrole et gaz naturel --- Contrats d'exploration et d'exploitation — Contrat portant sur les redevances — En général

Droit de redevance dérogatoire pouvait constituer un intérêt foncier, à condition que telle ait été l'intention des parties.

Pétrole et gaz naturel --- Concessions pétrolières et gazières — Questions diverses

Droit de redevance dérogatoire pouvait constituer un intérêt foncier, à condition que telle ait été l'intention des parties.

D Ltd. and its predecessor companies granted overriding royalty and net profit interests, respecting D Ltd.'s oil and gas leases, to E Ltd. and W. The bank was D Ltd.'s secured creditor. D Ltd. was petitioned into bankruptcy. The trustee wanted to sell all the oil and gas properties of D Ltd. One issue was whether any sale would be subject to overriding royalties arising out of the working interest held by D Ltd. The bank brought an application for determination that an overriding royalty was incapable of being an interest in land.

The chambers judge granted the application. He found that, as a matter of law, a lessee of an oil and gas lease obtained from a lessor could not pass an interest in land to a third party.

E Ltd. and W's appeal was allowed.

The Court of Appeal concluded that overriding royalty interests could constitute interests in land if intended by the parties.

The bank appealed.

Held: The appeal was dismissed.

Royalty arrangements were common forms of arranging exploration and production in the oil and gas industry. The owner of minerals in situ would typically lease to a potential producer the right to extract the minerals, known as a working interest. An overriding royalty is a royalty granted normally by the owner of a working interest to a third party in exchange for consideration.

At common law, an interest in land could not issue from an incorporeal hereditament.

The oil and gas industry was governed by a combination of statute and common law. Some common law concepts, developed in different social, industrial and legal contexts, were inapplicable in the unique context of the industry and its practices.

The bank could not offer any convincing reasons for maintaining the common law prohibition on the creation of an interest in land from an incorporeal hereditament. Given the custom in the oil and gas industry and the support found in case law, it was proper and reasonable that an overriding royalty interest could, subject to the intention of the parties, be an interest in land.

D ltée, ainsi que les compagnies l'ayant précédée, a accordé à E ltée et W un droit de redevance dérogatoire et un droit aux profits nets, et ce, conformément aux concessions pétrolières et gazières dont elle bénéficiait. La banque était le créancier garanti de D ltée. D ltée a fait l'objet d'une requête de mise en faillite, laquelle a été accordée. Le syndic de faillite voulait vendre tous les avoirs gaziers et pétroliers de D ltée. Une des questions en litige était celle de savoir si la vente serait conclue sous réserve des redevances dérogatoires provenant de la participation directe détenue par D ltée. La banque a présenté une demande pour qu'il soit statué qu'une redevance dérogatoire ne pouvait constituer un intérêt foncier. – 113 –

Le juge en chambre a accueilli la demande. Il a conclu que, en droit, le preneur à bail d'une concession pétrolière et gazière, obtenue d'un bailleur, ne pouvait transmettre un intérêt foncier à un tiers.

Le pourvoi de E ltée et W a été accueilli.

La Cour d'appel a estimé que les droits de redevance dérogatoire pouvaient constituer des intérêts fonciers si telle était l'intention des parties.

La banque a interjeté appel.

Arrêt: Le pourvoi a été rejeté.

Les arrangements en matière de redevances étaient de pratique courante dans le secteur de l'exploration et de la production pétrolières et gazières. D'ordinaire, le propriétaire des minéraux in situ donne à bail à un producteur potentiel le droit d'extraire les minéraux, lequel droit est connu sous le nom de « participation directe ». Une redevance dérogatoire est une redevance accordée normalement par le titulaire d'une participation directe à un tiers en échange d'une contrepartie.

En common law, un intérêt foncier ne pouvait être issu d'un héritage incorporel.

Le secteur des hydrocarbures était régi par un ensemble de lois et de règles de common law. Certaines notions de common law élaborées dans des contextes sociaux, industriels et juridiques différents étaient inapplicables dans le contexte particulier de ce secteur d'activité et de ses pratiques.

La banque n'a pu invoquer aucune raison convaincante justifiant le maintien de la règle de common law qui interdit la création d'un intérêt foncier à partir d'un héritage incorporel. Vu la coutume dans le secteur des hydrocarbures et l'appui fourni par la jurisprudence, il était opportun et raisonnable de reconnaître qu'un droit de redevance dérogatoire pouvait constituer un intérêt foncier, à condition que telle ait été l'intention des parties.

Annotation

The Supreme Court of Canada's decision in Dynex Petroleum is a "landmark" case and a "must read" for all practitioners of oil, gas and mining law. First and foremost, it settles, probably once and for all, the seemingly long- standing debate over the juridical nature of oil and gas royalties (which, judging from the extensive jurisprudence and academic commentary leading up to the Dynex Petroleum litigation, seems to have enjoyed somewhat of a mixed pedigree). Although the implications of Dynex Petroleum may ultimately extend far beyond oil and gas royalties in scope and Alberta in jurisdiction, the whole oil and gas industry that gives rise to the Dynex Pretroleum litigation is uniquely associated with Alberta, and it is fitting that the Supreme Court's reasons for this appeal from the Alberta Court of Appeal is delivered by none other than Mr. Justice John Major, himself an alumnist of the Alberta judiciary.

Greatly summarized, a "working interest" is a right given be a fee owner to a miner to extract minerals and is an incorporeal hereditament in the nature of a profit à pendre. It is this working interest that gives rise to payments known as "royalties", either back to the fee owner (a "lessor's royalty") or to a third party, typically a supplier (an "overriding royalty"), in each case based on the value of the minerals extracted.

In a well written decision, Mr. Justice Major concludes that royalties can, in fact, be interests in real property if the owner of the working interest and the owner of the royalty entitlement intended that the royalties constituted a right in the unproduced minerals in situ. In so doing, Mr. Justice Major considers and then rejects the age-old common law rule that any interest issuing from an incorporeal hereditament cannot, in and of itself, become, or constitute an interest in, real property.

The principal practical consequence of such a finding is, of course, that the title to the royalties and the relative priorities of the royalties vis-à-vis other encumbrances of the land can now be governed by the race or race-notice provisions of the applicable real property title registration regimes. This was precisely the issue adjudicated in Dynex Petroleum. From a strictly policy perspective, this is not such a terrible result since minerals in situ are, by nature, permanently situated and well suited to a legal description or address driven search engine like a real property register. Furthermore, it seems as if the practice of protecting royalties by the registration of caveats under the real property legislation was already a well ensconsed customary protocol for protecting royalties long before Dynex Petroleum was decided.

This annotator's endorsement of the Dynex Petroleum decision does not come without certain caveats of its own. First of all, this annotator is not entirely comfortable with the assertion that a property interest is either real or personal depending upon the intent of the parties creating the interest. The whole concept that the intent of the – 114 – immediate parties to the conveyance (and yes, "conveyance" would be a technically appropriate term for a transfer of an interest in land) governs the juridical nature of the interest is somewhat troubling, especially given that it is precisely third parties (i.e. parties not involved in the creation of the interest) that most desperately need the protection of objective rules by which to determine whether a given interest is real or personal (in order to search and register appropriately). The immediate parties to the conveyance are bound to each other in contract, if nothing else, and do not typically need, as against each other, to distinguish between real and personal property being conveyed.

This annotator also admits to being somewhat confused with the Supreme Court's assertion that "[r]oyalties, as used in the oil and gas industry, make sense only if they are property interests in unproduced minerals [in situ]." Although this annotator has no familiarity whatsoever with the business practices surrounding the granting of royalties, this annotator intuitively comes to the opposite conclusion: royalties make no sense if they are property interests in unproduced minerals in situ. If a royalty truly was an undivided percentage right in the minerals, that would make it something like a defacto assignment of an undivided fractional interest in the working interest itself. Instead, royalties seem somewhat more akin to promises given by the owner of the working interest to pay certain unspecified amounts for certain period(s), the exact quantum of each such payment being a direct function of the total amount extracted during such period(s). It might be illustrative to consider what might be the case if the owner of the working interest fails to extract any minerals, oil or gas notwithstanding its working interest, or extracts same inefficiently or incompetently. Is there then some remedy by royalty holders to seize the working interest and extract the riches themselves? If royalties are truly "property rights in unproduced minerals" one would expect that type of remedy. If, however, there is no such right on the part of royalty holders to seize and work the working interest themselves, then the royalty would look much like any other unsecured promise to pay.

Although probably considered a "win" for royalty owners generally (certainly the holding in Dynex Petroleum favoured the royalty owners who had registered their respective caveats on title long before competing real property lenders), the finding may ultimately prove to be a "double-edged sword" for royalty owners. So, while Dynex Petroleum validates the process of registering caveats at land registry offices to perfect and preserve priorities in royalties, by confirming that a royalty can be an interest in land if the language manifests such an intent, the law after Dnynex Petroleum pretty well mandates that such royalties must always now be registered on title lest priority or title be lost. Furthermore, query whether all of the implications of such a finding have percolated through the oil and gas industry. For instance, but without limitation: what are the potential tax consequences?; does the Statute of Frauds now apply to royalty deals?; and what are the appropriate limitation periods for enforcing royalties?

This annotator also notes that it may be possible to export the ratio in Dynex Petroleum beyond the confines of oil and gas royalties, as there is nothing in the reasons that limits the finding to just royalties. According to Dynex Petroleum, interests issuing from any incorporeal hereditaments can be interests in land, depending upon manifested intent. Although it is not immediately clear to this annotator what the long term implications of a wide- spread application of the ratio in Dynex Petroleum might be, it is interesting to note that, aside from a profit à pendre, the largest body of recognized incorporeal hereditaments is actually easements. Could it be that rights issuing out of or in respect of easements can now also be interests in land capable of binding the fee owner?

Jeffrey W. Lem