Essential Practice Tips for Real Estate Lawyers

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Toronto

Lecture Series—2013

Wednesday, September 18, 2013

Toronto Congress Centre

Essential Practice Tips for Real

Estate Lawyers

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Michael John Lamb, J.D. Ph: 519 645 1104 Barrister, Solicitor & Notary Public Fax: 519 645 1107

102-101, Cherryhill Blvd., Email:lamblaw@on.aibn.com London, Ontario,

N6H 4S4.

Mr. Lamb graduated from University of Western Ontario in 1985 with a Bachelor of Laws degree (converted in 2009 to Juris Doctor) and called to the Bar of Ontario in 1986 and is a member in good standing with the Law Society of Upper Canada and the Middlesex Law Association.

Mr. Lamb has a private law practice at Cherryhill on Oxford Street in London, Ontario, with an emphasis on real estate law. His litigation experience in real estate matters includes defending the rights of pet lovers to visit the graves of deceased pets and a single appearance at the Court of Appeal to argue an adverse possession/prescriptive easement war between neighbours!

He has been an Adjunct Professor of Real Estate Law at the Faculty of Law, University of Western Ontario since 1992 and has been nominated for teaching awards twice during that time. He is currently listed on the University of Western Ontario website as an expert in real estate law.

Mr. Lamb is a Member and former President of the Canadian Condominium Institute (London Chapter) and has been involved in lecturing to condominium owners, managers and directors on condominium issues.

In addition to speaking to various other organizations including a recent presentation to the Fraud Section of the London Police Service he has been quoted in the London, Free Press, Globe & Mail and interviewed by C.B.C. radio.

His dream of being part of the PGA tour was lost long ago but he still likes to think he plays a mean game of golf!

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In my 2012 paper I mentioned the old saying that practicing real estate law is like looking for a needle in a hay stack without being sure there is one in the first place! When Stewart Title Guaranty Company asked me to present papers in 2011 and 2012 I figured I had found most of those needles. Well, here we are in 2013 and I have found a few more to share with you. In this paper I would like to provide a few comments about the following topics:

Planning Act problems – how do we resolve them? Access to real estate - i.e. road access

Powers of Sale – what needs to be deleted?

Private Mortgages - Independent Legal Advice and other issues

Planning Act Problems:

Vendors and Purchasers Act

Perhaps one of the most difficult issues which can arise from time to time in a real estate practice is how to recognize and deal with Planning Actviolations. The

jurisprudence is full of decisions where a party has, unfortunately, relied upon advice concerning the implications of thePlanning Actin a transaction as a basis for

terminating the agreement only to be proved wrong. The result of course is a finding of breach of contract and, often, an award of damages. It seems to me that perhaps the most important comment I can make is that lawyers should consider the advantages of using theVendors and Purchasers Act R.S.O.1990 c. V.2 . In my 2012 Stewart Title Lecture Series paper I mentioned this little four section statute in the context of requisitions and of course aPlanning Actviolation would naturally lead to such a requisition. It is worth repeating then that an Application under this statute pursuant to Section 3(1) would be preferable to a full blown Action which will inevitably mean that one party will lose and face the consequences.

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Section 3 reads as follows:

Applications to court as to requisitions, objections, compensation, etc.

3. (1) A vendor or purchaser of real or leasehold estate or the vendor’s or purchaser’s representative may at any time and from time to time apply to the Superior Court of Justice in respect of any requisition or objection or any claim for compensation or any other question arising out of or connected with the contract, except a question affecting the existence or validity of the contract, and the court may make such order upon the application as may be considered just.

R.S.O. 1990, c. V.2,s. 3 (1); 2006, c. 19, Sched. C, s. 1 (1).

In theWhite v. Dafferndecision referred to later in the paper (dealing with Power of Sale issues) the Court was dealing with a Motion to determine a question of law which was central to the action which the Plaintiffs had brought against their solicitor. The law involved was the application of Section 50(18) and 50(22) of thePlanning Act to sales of adjoining parcels by a mortgagee under Power of Sale. However, what is of interest here is that an earlier related transaction had been the subject of a Vendors and Purchasers Act application where the Court found the requisition regardingPlanning Actcompliance had been satisfactorily answered and the transaction proceeded to close. InWhitefurther sale transactions became the focus of a full blown Action. The timing and costs clearly favour the use of this little statute.

Of course, not allPlanning Actproblems can be resolved in that manner; we may need to look for alternatives. One such avenue is to use Section 57 of the Act which provides as follows:

Validation certificate

57. (1) A council authorized to give a consent under section 53, other than a council authorized to give a consent pursuant to an order under section 4, may issue a certificate of validation in respect of land described in the certificate, providing that the contravention of section 50 or a predecessor of it or of a by-law passed under a

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have had the effect of preventing the conveyance of or creation of any interest in such land. 1993, c. 26, s. 63; 1996, c. 4, s. 30 (1).

Limitation

(2) A certificate of validation under subsection (1) or an order of the Minister under subsection (3) does not affect the rights acquired by any person from a judgment or order of any court given or made on or before the day on which the certificate is issued or order is made. 1993, c. 26, s. 63.

Territorial district

(3) If the Minister has authority to give consents under section 53, the Minister may by order exercise the powers conferred upon a council by subsection (1) in respect of land in a territorial district. 2002, c. 17, Sched. B, s. 23.

Proviso

(4) No order shall be made by the Minister under subsection (3) in respect of land situate in a local municipality unless the council of the local municipality in which the land is situate has by by-law requested the Minister to make such order, and the council has the power to pass that by-law. 1993, c. 26, s. 63; 2009, c. 33, Sched. 21, s. 10 (15).

Conditions

(5) A council may, as a condition to the passage of a by-law under subsection (4), impose such conditions in respect of any land described in the by-law as it

considers appropriate. 1993, c. 26, s. 63.

Criteria for consideration

(6) In considering whether to issue a certificate under subsection (1), regard shall be had to the prescribed criteria. 1993, c. 26, s. 63.

Criteria for certificate

(7) No certificate shall be issued by a council under subsection (1) unless, (a) the land described in the certificate conforms with the prescribed criteria; or

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(b) the Minister, by order, has exempted that land from the criteria. 1993, c. 26, s. 63.

Conditions

(8) A council or the Minister may, as a condition to issuing a certificate of validation or order, impose such conditions in respect of any land described in the certificate or order as it considers appropriate. 1993, c. 26, s. 63.

Proviso

(9) Nothing in this section derogates from the power a council or the Minister has to grant consents referred to in section

So, where we find a Transfer or Charge on title which should have been the subject of a Consent under Section 50(3) or 50(5) we can make an application under Section 57 for a validation certificate. As noted in subsection (8) the municipality can impose

conditions in the same manner it could have done if there had been a severance application in the first instance. That of course could include such things as road widening and financial contributions to development funds.

An alternative to the use of Section 57 where the Transfer to the current owner should have been the subject of a consent is to apply for the consent following which a new, correcting, Transfer involving the same parties is prepared and registered. The consent can be endorsed upon the new Transfer prior to registration.

Section 50(22) Statements

Every now and again we encounter a file where we are not sure if there is a Planning Actissue or not. In some of those situations we can perhaps discuss the issue with a fellow solicitor, put a memo in the file and consider if the use of the statements provided for in Section 50(22) are of any assistance. That subsection provides as follows:

Exception re prescribed statements (22) Where a deed or transfer,

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(i) he or she has explained the effect of this section to the grantor,

(ii) he or she has made inquiries of the grantor to determine that the deed or transfer does not contravene this section,

(iii) based on the information supplied by the grantor, to the best of the solicitor’s knowledge and belief, the deed or transfer does not contravene this section, and

(iv) he or she is an Ontario solicitor in good standing; and

(c) contains a statement by the grantee’s solicitor, verifying that,

(i) he or she has investigated the title to the land and, where relevant, to abutting land,

(ii) he or she is satisfied that the record of title to the land and, where relevant, to abutting land, reveals no existing contravention of this section or a

predecessor thereof or of a by-law passed under a predecessor of this section or of an order made under clause 27 (1) (b), as it existed on the 25th day of June, 1970, of The Planning Act, being chapter 296 of the Revised Statutes of Ontario, 1960, or a

predecessor thereof, that has the effect of preventing the conveyance of any interest in the land,

(iii) to the best of his or her knowledge and belief, the deed or transfer does not contravene this section, and

(iv) he or she acts independently of the grantor’s solicitor and is an Ontario solicitor in good standing; and

(d) is registered under the Land Titles Act or the Registry Act,

any contravention of this section or a predecessor thereof or of a by-law passed under a predecessor of this section or of an order made under clause 27 (1) (b), as it existed on the 25th day of June, 1970, of The Planning Act, being chapter 296 of the Revised Statutes of Ontario, 1960, or a predecessor thereof, does not and shall be deemed never to have had the effect of preventing the conveyance of any interest in the land, but this subsection does not affect the rights acquired by any person from a judgment or order of any court given or made on or before the day the deed or transfer is registered. R.S.O. 1990, c. P.13, s. 50 (22).

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(23) For the purposes of the statement referred to in subclause (22) (c) (ii), a solicitor is not required to investigate the registered title to the land except with respect to the time since the registration of the most recent deed or transfer affecting the same land and containing the statements referred to in clauses (22) (a), (b) and (c). R.S.O. 1990, c. P.13, s. 50 (23).

Exempting orders

(24) The Minister may by order designate any part of Ontario as land to which subsection (22) shall not apply after the day a certified copy or duplicate of the order is registered in the proper land registry office in a manner approved by the Director of Land Registration appointed under the Registry Act. R.S.O. 1990, c. P.13, s. 50 (24).

Offence

(25) Every person who knowingly makes a false statement under subsection (22) is guilty of an offence and on conviction is liable to a fine not exceeding the aggregate of the value of,

(a) the land in respect of which the statement is made; and (b) the relevant abutting land,

determined as of the day of registration of the deed or transfer containing the false statement. R.S.O. 1990, c. P.13, s. 50 (25).

The statements are of course provided for in Boxes 12 and 13 of the statutory form of Transfer and can only be inserted where there are two independent solicitors

representing the parties. And, the statements can only be used where there is a

genuine belief that there are noPlanning Actproblems or violations. We have to bear in mind the sanction provided for in subsection 25 reproduced above that any person knowingly making a false statement can be liable to a fine not exceeding the value of the land involved and the relevant abutting land.

However, if the 50(22) statements are in fact included in a Transfer it has the effect of “white washing” title from aPlanning Actperspective including the subject transaction. This was confirmed in Reeve Burns v. Pelkman (1989, 70 O.R. (2d) 113 (Ont. Dist. Ct.)

In that case a purchaser’s solicitor noted that although the statements had been included in the Transfer to the Vendor there was a clear breach of the Act in a prior transaction. Justice Gordon Killeen of what was then the District Court in London,

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Court held that the statements pursuant to 50(22) having been included saved the grant.

Prior Consent

Another possible answer to an apparentPlanning Actviolation where adjoining properties appear to have merged is that a prior consent was issued for one or both properties. Section 50(12) provides as follows:

Exception to application of subss. (3, 5)

(12) Where a parcel of land is conveyed by way of a deed or transfer with a consent given under section 53, subsections (3) and (5) of this section do not apply to a subsequent conveyance of, or other transaction involving, the identical parcel of land unless the council or the Minister, as the case may be, in giving the consent, stipulates either that subsection (3) or subsection (5) shall apply to any such subsequent

conveyance or transaction. R.S.O. 1990, c. P.13, s. 50 (12).

It is of course necessary to review the prior consent to ensure two things; firstly that the land involved in the consent is identical to that in the current transaction and secondly that the consent did not contain any restrictions as to its application to subsequent transactions.

Exempting Bylaws

It can sometimes appear that a transaction dealing with part of a lot on a registered plan of subdivision required or does require a consent pursuant to Section 50(3) or (5) and was or is void for lack of same. However, title may reflect registration of an exempting bylaw enacted pursuant to Section 50(7) which states follows:

(7) Despite subsection (5), the council of a local municipality may by by-law provide that subsection (5) does not apply to land that is within such registered plan or plans of subdivision or parts of them as are designated in the by-law. 1996, c. 4, s. 27 (3).

The rationale for such bylaws of course is to avoid unnecessary time and paperwork spent on situations where the municipality has authorized a development of say a dozen semi-detached homes on six lots which are all to be divided in half. Without the

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exempting bylaw it would have been necessary to endorse a consent to the severance on each of the twelve Transfers prior to registration.

Pre June 15th 1967 transactions

It is perhaps worth mentioning, if only for historical reasons, that any transaction which occurred prior to June 15th1967 and which violated Section 50 of the Planning Act was forgiven by a special amendment to the Act. This was deemed necessary because of the confusion arising out of the “checker board” schemes such as reviewed in Forfar

and the fact that thousands of titles would have been in jeopardy. It was considered politically and practically a good idea to wipe the slate clean. However, the Provincial government of the time made it quite clear that it would not be inclined to pass any similar legislation again. Today, we have the advantage of at least knowing that there can really be noPlanning Actconcerns prior to June 15th1967.

Vendor Take back Mortgages

One further situation which should perhaps be mentioned is where a vendor takes back a mortgage on closing as part of the consideration for the sale and where the purchaser already owns adjoining lands. The problem is of course that once the Transfer to the Purchaser is registered the title will merge with the adjoining lands. The mortgage to the vendor is then a charge against only part of the purchaser’s newly merged titles and would, in the normal course, require consent pursuant to Section 50(3) or (5). However, that situation, which was the subject of litigation inDrewery et al v. Century City Dev. Ltd (1974), 52 D.L.R. (3d) 515 (Ont. H.C.),was resolved by the addition of Subsection (8) to Section 50. That addition provides as follows:

Exception

(8) Nothing in subsections (3) and (5) prohibits, and subsections (3) and (5) shall be deemed never to have prohibited, the giving back of a mortgage or charge by a purchaser of land to the vendor of the land as part or all of the consideration for the conveyance of the land, provided that the mortgage or charge applies to all of the land described in the conveyance. R.S.O. 1990, c. P.13, s. 50 (8).

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However, it is important to recognize the limitations of this subsection. First, the

mortgage/charge must be part of the sale transaction. A mortgage/charge at a later date even between the same parties but for different reasons (perhaps a separate loan or investment ) does not allow the use of subsection (8); a consent would be required. Second, the mortgage/charge must be to the vendor not directed by the vendor to be registered in the name of a related person or entity. Note that if the purchaser obtained a mortgage from a bank or other third party to finance the transaction this subsection is of no use and a consent will be required. And, lastly, the mortgage/charge must be applied to the same parcel or land conveyed; not part of it or some other configuration involving adjoining lands of the purchaser.

Adjoining Lands held in Trust

One last situation which I wanted to address before leaving the Planning Actis where adjoining lands are owned or controlled by the vendor or mortgagor in a sale or

mortgage situation. The starting point for that discussion is of course the decision in

Re: Forfar & Township of East Gwillimbury et al (1971), 20 D.L.R. (3d) 377 (Ont. C.A.)

which stated that we should not only be concerned with the registered owner of the fee in adjoining lands but also who controls or has power over the fee in adjoining lands . The Ontario Court of Appeal said:

“[the Planning Act]should not be interpreted to construe “fee” in its narrow technical sense. The Act is designed to prohibit transactions involving not only the fee but control or power over the fee.”

The decision was appealed to the Supreme Court of Canada which said:

“We are all in agreement …. that the words “retain the fee” embraces not only the holder of the fee but the holder of the power over the fee …and the term “grantor” must have a concordant meaning “

The reader will no doubt be familiar with these decisions which involved “checker boarding” schemes which were designed to and did in fact avoid compliance with the

Planning Act. However,Forfaralso created what appeared to be another problem. Where abone fidepurchaser acquired title to a property without knowledge that the vendor owned or controlled adjoining property which was registered in the name of another in trust for that vendor it would seem that control of the fee existed and consent required. The problem is of course that a search of adjoining lands would show

registered owners and not reveal situations where the same party controlled the fee. Investigating whether adjoining owners really owned lands or held them in trust for

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another would be a daunting if not impossible task. Adjoining owners would be under no obligation to discuss such arrangements and vendors would be reluctant to offer such information. In any event, the issue was addressed inReference re Certain Titles to Land in Ontario (1975), 35 D.L.R. (3d) 10 (Ont. C. A.). Unlike the situation in Forfarand other similar schemes the Court held that while the vendor might be the beneficial owner of adjoining lands the registered owner still had the ability to transfer title and therefore “control” was not the same as that referred to in theForfardecision. The Court went on to say that abone fidepurchaser without notice of the trust would receive good title. The caution here is that if the purchaser does have actual notice of the trust then a consent would be required for the transaction assuming of course that another

exception did not apply. A Transfer registered on adjoining lands stating that the property is held in trust is not a problem as there is no requirement to look behind the title and look at the trust. However, a notation on title naming the beneficial owner as the same party who owns the lands in a subject transaction is fatal and will require consent. Likewise, there could be actual notice such as the vendor or realtor

mentioning that adjoining properties, such as farmland, are also owned by the vendor.

I keep in my library a copy of the 1984-85 Ontario Bar Admission Course materials which contains a sixty page appendix full ofPlanning Actdecisions and related statutory changes made over the years. I don’t believe the appendix was duplicated in any

subsequent editions. Clearly, I have by necessity been very selective in what is discussed here in the context of thePlanning Actbut hopefully it will serve to be of some assistance to the reader.

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Access

The next topic which I wanted to review is that of access to real estate. Not all properties are of course served by provincial or municipally dedicated highways or roads. The 2005 Ontario Bar Admission Course materials had a summary dealing with electronic title searching and a couple of paragraphs dealt with access. It stated at the outset that“access must be verified and cannot be assumed”but I suspect that many times access is assumed!

We can at least take some comfort from Section 57 of theSurveys Act R,S.O. 1990 c. S.30which is as follows:

Public roads, etc.

57. Subject to the Land Titles Act or the Registry Act as to the amendment or alteration of plans, every road allowance, highway, street, lane, walk and common shown on a plan of subdivision shall be deemed to be a public road, highway, street, lane, walk and common, respectively. R.S.O. 1990, c. S.30, s. 57.

TheLand Titles Act R.S.O. 1990 c. L.5does contain a reference to roads in Section 151 (1) which states:

151. (1) Where a plan of subdivision lays out a part of the land as a street, road, lane or common, it shall not be registered except on the application of the owner of the land subdivided with the consent in writing of all persons who are

registered as mortgagees or chargees thereof. R.S.O. 1990, c. L.5, s. 151 (1).

What is important to note is that theSurveys Actdoes not provide that one foot reserves shown on plans of subdivision are also automatically deemed to be public roadways. In fact, the reader will already be aware that these reserves, usually one foot in width are required to be inserted into subdivision plans as a control mechanism by municipalities. The reserves are typically transferred to the municipality at the time the subdivision is registered in accordance with the subdivision or development agreement. When the

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subdivision has been completed, the roads maintained and all conditions met the municipality will then pass a bylaw declaring the reserves as public highway. In the meantime there is technically no access to the interior roads of the subdivision which becomes partly or totally landlocked from the existing road system.

Of course, most properties in urban areas are usually situated on subdivisions and serviced by public highways and municipally adopted roads. It is when we are dealing with rural properties, cottages, farms and so on that we have to be more diligent in ensuring adequate access and assessing potential issues. The CCH Real Estate Guide has a very useful list of thetypes of accesswhich may serve properties in these situations. I set them out here with a couple of comments of my own:

1. Open publically maintained year round roads

2. Open publically maintained seasonal roads. Finding such a road exists to serve a property should also be a red flag to check the zoning for the use of the

property. It may be the case that seasonal use only is permitted by the zoning bylaw and not year round use.

3. Ministry of Natural Resources road over Crown land. In this situation a letter of consent from the Ministry should be obtained permitting use.

4. Unopened road allowance (such as an original shore road allowance). 5. Trespass Road.

6. Colonization and other such roads

7. Private deeded road. Issues of responsibility of maintenance and repair can still be an issue

8. Undeeded right of way such as acquired by prescription. This issue was further reviewed in my 2011 paper presented for Stewart Title.

9. Water access. The problem here is that not only is access for vehicular traffic probably required but consideration must be given to ownership of the shoreline on both access points. The Ministry of Natural Resources may have a part to plan in establishing the parameters of access.

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Determining the quality and extent of access of course starts with enquiries of the

vendor or owner. Statutory Declarations can be sought detailing not only the quality and extent but longevity of the access. In addition recourse can be had to reference plans registered or otherwise, municipal and county plans, block maps and even street maps. Parcel registers may exist for the roadways, reserves and road widening surveys all of which can help establish the access information. A specific survey for a property should also be obtained showing not only the boundaries of the property but also the access. If there is no access identified then the property is landlocked and appropriate requisitions need to be made.

Road Access Act

Set out in the Appendix to this paper is theRoad Access Act R.S.O 1990 R.34. This little statute may appear to be a stepping stone to acquiring access but is far from it. I suggest that this statute is of sufficient significance to warrant further discussion.

In2008795 Ontario Inc v. Kilpatrick, 2007 ONCA 586 Justice Laskin of the Ontario Court of Appeal started with an overview of the facts and said:

“this is another in a spate of recent cases in this Court under Ontario’s Road Access Act”

He continued by pointing out that the Act was passed to resolve disputes between neighbours when a property is landlocked and the only motor vehicle access to it is over a road on property owned by another neighbour. The Act states that the owner of the road cannot close it without a court order. Justice Laskin also pointed out that implicity the Act allows the owner to close the road without a court order if there is “alternative road access” to the landlocked property. The appeal turned on what constitutes “alternate road access”.

The case dealt with the owners of, surprize, a group of cottagers in the Lake St. John area who sued for an injunction to prevent their use of a road to and from the cottages being blocked. The dispute had only arisen after many years of use of the road access because the owner of the road began demanding payment for maintenance. The trial judge had found the annual fee of $2,000.00 to be arbitrary and excessive and granted the injunction requested by the cottagers. The owner of the road argued on the appeal that they had a right to close the road without court order because there was “alternative road access”. It argued that an unopened road allowance existed or in the alternative the existing access is still available if the owners pay the fee. The appeal court found

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that neither constitutes such alternative access; it would have to another existing road which would permit motor vehicle access at the time of anticipated closure.

What is very important to note is that the Act does not create or acknowledge the user as having a right to use the road. The Court noted:

“… persons using an access road … cannot claim a legal right to do so…. A legal right must be a legal right that exists apart from the Act ..”

Indeed Section 6(1) of the Act states:

“Nothing in this Act shall be construed to confer any right in respect of the ownership of land where the right does not otherwise exist at law and nothing in this Act shall affect any alternative remedy at law available to any applicant or other person.”

The Court went on further and said:

“Thus, the Act confers on users of an access road only a very limited and temporary right to use the road to go to and from their properties”

The limited statutory right given to owners, said the Court, creates no proprietary right or interest over the access road and only gives interim status to prevent an action for trespass. Further, the user cannot convey any right to the road on a sale of the parcel of land. So, in the end result the Court said that so long as there is alternative road

access the owner of the road is entitled to the Order closing it. In this particular case the Court of Appeal found that there was no actual existing alternative access; an unopened road allowance does not qualify nor does requiring a user fee to be paid to use the existing road.

Finally, however, the Court suggested that the cottage owners might very well be advised to reach an agreement with the owner because there is no real defence to an application to close an access road where a real alternative exists. The appeal was dismissed.

I won’t belabour the discussion but I have to say Justice Laskin was right; there has been a lot of litigation surrounding theRoad Access Act. In992275 Ontario Inc et al v. Krawczyk 2006 CanLII 13955 (ON CA)the Court noted that finding that a road is an access road establishes only a relatively limited privilege (paragraph 9) and that a finding that a road is an access road does not give the users a legal right to use it within

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“The Act neither expands nor reduces the scope of the acquisition of rights of way or easements under the common law”

“the Act does not place any obligation on a landowner to maintain an access road across his or her property”

and finally:

“it is worth noting that the Act provides no assurance to those who use and depend on an access road that it will continue to be available to them in the future”

And the other decision isEbare v. Winter 2005 CanLII 247 (ON CA)where the user of the road sought either a declaration of a prescriptive easement or in the alternative that the road was an “access road” within the meaning of the Act and could not be closed given no alternative access to their parcel. However, the trial Judge found that a prescriptive easement had not been proven based on the doctrine of lost modern grant and further there was no evidence that there was no alternative access. Accordingly, the claim was dismissed. The Appeal was also dismissed. The user had argued at trial and on appeal that any alternative access had to be “legal access” but was rejected in both forums. The Court found that alternative routes over private property could still be considered “access roads” within the Act by showing permission to use same or that such roads themselves constitute “access roads”. Clearly then, given these

decisions, use of theRoad Access Actprovides little comfort to a land owner who uses an access road.

Overburdening use

One last matter to consider in the access to property is the possible overuse or

overburdening in the exercise of a legitimate right of way. Consideration has to be given as to the current use of the right of way being consistent with the original intention, sometimes expressed in the document itself. This topic was the focus of the decision inMackenzie v. Matthews et al 1999 CanLII 3801 (ON CA). That case dealt with a right of way granted to cottage owners who owned islands on Pigeon Lake. The right of way was situate on the shore of the mainland and various documents established that the right of way was for the use of the “registered owners of the islands” , that no grant would be given to “the public at large” and finally that it would only be available for the

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“owners, guests and tradesmen” of the islands. However, disputes arose as to the use of the right of way to reach an adjoining parcel which had a vehicle turnaround and was the subject of a separate right of way. The problem was that this turnaround was next door to a lodge on the mainland and patrons were using the right of way to reach it; clearly not related to the islands. In any event the Court said a couple of things of interest. First, the Appeal Court found that the trial judge was correct in deciding that the right of way included ancillary rights which are reasonably necessary to the use and enjoyment of the easement. This included extending the right of way to invitees and guests, the right to install a dock, to park cars and boat trailers, to use the vehicle turnaround. Further, if the owners of the right of way want to restrict access to patrons of the lodge, which they are entitled to do it can only be done with an unlocked gate which allows the island folks to continue with their access. So, while the trial judgment was essentially upheld and the island owners content. We do need to pay attention to two things the Court said:

…the rule that an easement cannot be used to gain access to a property other than that for which the easement was created does not apply in the

circumstances of this case. That rule precludes the user of a right of way from enlarging the burden of the easement on the servient tenement by using it for a purpose different from that which it was created.”

Citing an English Court of Appeal decision, Harris v. Flower (1904), 74 L.J. Ch. 127 the Court noted that the use of a right of way to access a factory on adjoining lands which had not previously been there created“ a significant and unacceptable enlargement of the burden of the right of way”.

The lesson in all of this is of course that we need to establish the quality, extent and use of access to real property.

Title Insurance option

Not only do we have to discuss access issues with a purchaser or mortgagee but we need to make sure we have communicated all relevant information to the title insurer. The insurer may wish to insert exclusions or offer coverage for certain aspects of access.

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Power of Sale: Priorities

A mortgagee has a right to sell real property securing the mortgage debt upon default pursuant to either the express provision in the Mortgage/Charge or, implied under Section 7 (1) 1 v) of theLand Registration Reform Act R.S.O. 1990, Chapter L.4 or in exceptional cases,Section 24 of the Mortgages Act R.S.O. 1990, c M.40. Typically the mortgagee is proceeding pursuant to the express provision in the Mortgage and the real estate lawyer will obviously be concerned that the process of selling the property

complies with theMortgages Actand that the requirements for electronic registration are met. However, of equal importance is that consideration must be given to priority enjoyed by the mortgage relative to other claims or interests registered before or after registration of the mortgage or after issuance of a Notice of Sale. I will review some of these interests in this portion of the paper.

Executions

One subsection of Section 10 of theExecution Act R.S.O. 1990, c. E.24 dealing with Writs of Execution provides as follows:

“Real property

(4) A sheriff to whom a writ of execution, a renewal of a writ of execution or a certificate of lien under the Bail Act is directed shall, upon receiving from or on behalf of the judgment creditor the required fee in accordance with the Administration of Justice Act and instructions to do so, shall promptly take the following actions:

1. Enter the writ, renewal or certificate of lien, as the case may be, in the electronic database maintained by the sheriff as the index of writs of execution.

2. Indicate in the electronic database that the writ, renewal or certificate of lien, as the case may be, affects real property governed by the Land Titles Act. 2010, c. 16, Sched. 2, s. 3 (16).”

and provides the following as to the effective date of the Writ: Effective date of writ, etc.

(6) Subject to section 11 and the Land Titles Act, a writ of execution, a renewal of it or a certificate of lien under the Bail Act binds the lands against which it is issued from the effective date of the writ, renewal or certificate noted in the electronic database

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maintained by the sheriff as the index of writs of execution. 2010, c. 16, Sched. 2, s. 3 (16).

Same

(7) The date of receiving a writ, a renewal of it or a certificate of lien referred to in clause 136 (1) (d) of the Land Titles Act is deemed to be the effective date referred to in subsection (6). 2010, c. 16, Sched. 2, s. 3 (16).

As most readers will know then a Writ of Execution binds the lands of the debtor from the date it is filed with the Sheriff and entered into the electronic database. It follows that if a Writ of Execution has been registered prior to registration of a Mortgage/Charge it will enjoy priority over the mortgage and must be paid out from the proceeds of sale in priority to the mortgage. A Purchaser from the mortgagee will have to ensure that such executions are in fact and deleted otherwise the property will be transferred subject to such writs. It may also occur that mortgage funds were advanced in stages and an execution filed with the Sheriff between advances will enjoy priority over the subsequent advances.

Subject to my comments regarding CRA “super liens” ( at page 30) a mortgage will enjoy priority over Writs of Execution filed subsequent to registration of the mortgage provided that the execution creditor has been served with the Notice of Sale. The Writ of Execution filed by a creditor who has not been properly served is not cut out by the sale and would either have to be paid out or a new Notice issued.

One last situation to look at is the similar name execution. Unless a mortgagee had evidence that a debtor was not one and the same as a debtor shown on a Writ of

Execution appropriate notice would have to be given to the creditor. The writer recently experienced such a situation and the mortgagee’s solicitor was reluctant to provide any information regarding such an execution until I pointed out that I would have to assume the debtor and mortgagor were one and the same and as notice had not been given to the creditor the Notice was in fact defective. Evidence was quickly provided which satisfied me that the two were not one and the same. Had I not been able to establish same and the closing took place the writ may still have been effective and be binding on the land.

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provides for registration of such a lien within three months of the lien arising failing which the lien expires. What is important for this discussion is that the lien enjoys priority over every registered encumbrance even though the encumbrance was registered before the lien arose. The subsection provides as follows:

Priority of lien

86. (1) Subject to subsection (2), a lien mentioned in subsection 85 (1) has priority over every registered and unregistered encumbrance even though the encumbrance existed before the lien arose but does not have priority over, (a) a claim of the Crown other than by way of a mortgage;

(b) a claim for taxes, charges, rates or assessments levied or recoverable under the Municipal Act, 2001, the City of Toronto Act, 2006, the Education Act, the Local Roads Boards Act or the Statute Labour Act; or

(c) a lien or claim that is prescribed. 1998, c. 19, s. 86 (1); 2002, c. 17, Sched. F, Table; 2006, c. 32, Sched. C, s. 7.

Exception, non-residential lien

(2) A lien in respect of a unit for non-residential purposes does not have priority under this section in respect of the amount by which the owner of the unit has defaulted in the obligation to contribute to the common expenses before the coming into force of this section. 1998, c. 19, s. 86 (2).

Note that the lien does not enjoy priority of claims of the Crown, tax liens and

“prescribed liens”. Further, the lien does not enjoy priority over non-residential units. In any event a purchaser’s lawyer will obtain and review a Status Certificate prior to

closing which should set out the amount owing on a registered lien as at the date of the Certificate. Even if a lien has not been registered the property may still be subject to an unregistered lien for arrears accumulated during the previous three month period. This is because the lien only expires if registration does not occur within three months of the lien arising. The wording of Section 86 (1) does not require that the lien be registered in order to enjoy priority; the Section simply refers to “a lien”. Accordingly, a mortgagee selling under power of sale will be required to discharge a common expense lien

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Utilities

The former Section 31 (1) of thePublic Utilities Act R.S.O. 1990, c .P.52provided that amounts payable by an owner or occupant of land for the supply of “public” utilities were a lien upon the land and could be collected by the sale of the person’s interest in the land and further, constituted a lien and charge upon such lands in the same manner and to the same extent as municipal taxes. That of course gave the lien priority over other claims or interests due to the effect of what is now Section 349 (3) of the Municipal Act

which provides as follows:

Special lien

(3) Taxes are a special lien on the land in priority to every claim, privilege, lien or encumbrance of every person except the Crown, and the lien and its priority are not lost or impaired by any neglect, omission or error of the municipality or its agents or through taking no action to register a tax arrears certificate. 2001, c. 25, s. 349 (3).

While outstanding realty taxes were usually paid by mortgagees exercising a power of sale the state of the account for utilities was not always considered. This could result in a municipality adding outstanding utilities to realty taxes and claiming same from a purchaser from the mortgagee. Indeed, this is what occurred in a motion made by an unsuspecting purchaser inMauro v. The Corporation of the City of Thunder Bay, 2005 CanLII 19849 (ONSC). Following closing of a purchase from a bank pursuant to its power of sale the purchaser was faced with a demand from the City of Thunder Bay to pay an outstanding water bill incurred by the previous owner. The purchaser resisted payment, filed the motion and argued that unless the utility account had been added to the tax roll the mortgagee sells the property free and clear of same. The Court noted that the lien comes into existence upon the utilities being provided, the application to the purchaser was clear, the legislation maybe draconian and dismissed the motion!

All this may seem academic because Section 31, along with a number of other sections, of thePublic Utilities Actwas repealed in 2001 and so the link between that Act and the

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but I suggest the problem has not gone away. The following section which does remain in thePublic Utility Actis still of , at a minimum, practical importance:

Remedy for price of public utility furnished

59. If any person supplied with any public utility neglects to pay rent, rate or charge due to the company at any of the times fixed for the payment thereof, the company, or any person acting under its authority, on giving forty-eight hours previous notice, may stop the supply from entering the premises of the person by cutting off the service pipes or by such other means as the company or its

officers consider proper, and the company may recover the rent or charge due up to that time, together with the expenses of cutting off the supply, despite any contract to furnish it for a longer time. R.S.O. 1990, c. P.52, s. 59.

It is true that the outstanding account is no longer a lien on the premises or that a purchaser should have any responsibility for same. However, coupled with Section 50 (4) it may continue to be a problem. It states:

Power to require security from consumer

(4) Any corporation before supplying any public utility to any person or to any building or premises, or as a condition of continuing to supply the utility, may require any consumer to give reasonable security for the payment of the proper charges therefor or for carrying the public utility into the building or premises. R.S.O. 1990, c. P.52, s. 50.

While “reasonable security” will clearly apply only to future obligations of the purchaser to pay utilities it will be understandable that a purchaser would also be put under some pressure to ensure previous bills are paid. From a practical point of view then a purchaser should, in my view check the status of the utility account and ensure that outstanding amounts are paid on closing or an undertaking to do so is obtained.

Realty Taxes

As noted above, Section 349 (3) of theMunicipal Actprovides that realty taxes are a special lien and ranks in priority to all other interests except those of the Crown. In the situation where a client is purchasing from an owner we rely upon a Statement of Adjustments, the vendor’s knowledge as to any outstanding realty taxes (usually

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supported by a copy of tax bill or expressed in the Declaration of Possession) and a vendor’s undertaking to readjust after closing if necessary. A mortgagee selling under power of sale is not always in a position to have accurate knowledge and certainly reluctant to provide an undertaking to readjust. So, the purchaser, and his or her lawyer, will have the responsibility to check the status of realty taxes. That should, in my view, be accomplished by obtaining a formal Tax Certificate pursuant to Section 352(1) of the

Municipal Actbecause there will likely be no other representation as to tax payments or arrears. Mortgagees should either direct on closing for a cheque to be issued to the municipality in payment of outstanding taxes and penalties or provide an undertaking from its solicitor to do so immediately following closing.

Corporations

Older practitioners such as myself will recall the days when unpaid corporate taxes were an automatic lien on all property of a corporation including real estate.

Accordingly, it was necessary to submit written requests to the Province of Ontario for confirmation that a corporate vendor or mortgagor was not in arrears of corporate taxes. Fortunately, today the lien does not affect real property unless notice claiming a lien is registered in the appropriate land registry office. The relevant section of the

Corporations Tax Actis 99(1) which provides as follows:

Lien on real property

99. (1) Any amount payable or required to be remitted under this Act by any person is, upon registration by the Minister in the proper land registry office of a notice claiming a lien and charge conferred by this section, a lien and charge on any interest the corporation liable to pay or remit the amount has in the real property described in the notice. 1994, c. 14, s. 44 (1); 2004, c. 16, s. 2 (2).

Subsection (3) of Section 99 provides that following registration the lien enjoys priority over any subsequent encumbrance registered thereafter. So, if a mortgagee is selling a property based upon a mortgage registered after registration of a Notice pursuant to Section 99 then it must be discharged from the proceeds of sale in priority to the mortgage.

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pursuant to Section 242 (4) of theBusiness Corporations Act R.S.O. 1990, c. c B.16.

Accordingly, a purchaser from a mortgagee selling under power of sale might be advised to obtain a Corporate Status Certificate or similar search to confirm that the corporate mortgagor was in fact active at the time the notice of sale was issued. This is particularly a good idea given the provisions of the following section:

Forfeiture of undisposed property

244. (1) Any property of a corporation that has not been disposed of at the date of its dissolution is immediately upon such dissolution forfeit to and vests in the Crown. R.S.O. 1990, c. B.16, s. 244 (1); 1994, c. 27, s. 71 (31).

Exception

(2) Despite subsection (1), if a judgment is given or an order or decision is made or land is sold in an action, suit or proceeding commenced in accordance with section 242 and the judgment, order, decision or sale affects property belonging to the corporation before the dissolution, unless the plaintiff, applicant or

mortgagee has not complied with subsection 242 (3) or (4),

(a) the property shall be available to satisfy the judgment, order or other decision; and

(b) title to the land shall be transferred to a purchaser free of the Crown’s interest, in the case of a power of sale proceeding. 1998, c. 18, Sched. E, s. 28 (1).

Note that the land would only be transferred free of the Crown’s interest if subsection (3) or (4) of Section 242, noted above has been complied with. Subsection (3) deals with when notice is to be given where an action is commenced. So, corporate tax arrears can still be an issue to consider in power of sale transactions.

Vendor Liens

Real estate practitioners will know that where a vendor does not receive full payment on closing an equitable lien arises by operation of law automatically. Given that the lien arises on closing it would seem to take priority over subsequent encumbrances including an unsuspecting mortgagee who believes it has a first charge against the

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property. Authority for this “vendor lien” can be found inFreeborn v. Goodman [1969] S.C.R. 923. However, priority issues were reviewed inHosseini v. Salerno 2010 ONSC 503 (CanLII)where the purchaser assumed a first mortgage and gave a second

mortgage on closing to a third party, Salerno. The vendor had not been paid in full on closing and a few days after closing registered vendor’s liens against the property. Following a subsequent sale under power of sale by the first mortgagee the vendor, Hosseini and the second mortgagee, Salerno squared off in an action as to who had priority to the surplus funds and a Motion for Summary Judgment was brought by the second mortgagee. The Court pointed out:

“When a mortgage is placed on title at closing in order to obtain the purchase money, the Vendor’s Lien must give way to the mortgage. The intention of the parties as to priority is thereby engraved on the transaction and that intention must be respected”.

The Court citedSilaschi et al v. 1054473 Ontario Ltd et al., [2000] O.J. No. 1399 (Ont. C.A.)as authority for that proposition. The Court went on to mention that in any event the mortgage had been registered before the vendor’s liens were registered and so the mortgagee did not have notice of same. Of significance though is that the vendor’s lien had not been mentioned in the Transfer to the purchaser. Had that been the case we would no doubt have seen a different result. While vendor liens may be few and far between it is certainly a good idea, in my view, to review a copy of the Transfer to the defaulting borrower just to ensure that a vendor’s lien does not intervene between the Transfer and mortgage under which a power of sale is being conducted. If such a lien exists it may very well have priority and must be discharged by the selling mortgagee from the proceeds of sale.

Mortgages/Transfers and Merger

Another situation which occasionally turn up is where a mortgagor is relieved from further obligations under a mortgage by giving a Transfer or Quit Claim Deed ( as it used to be called) to the mortgagee. The effect, usually, is that the title and mortgage merge and there is no longer a mortgage to enforce. Any attempt to enforce the

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from the decision inKramer v. Woodrow 1997 CanLII 12200 (ONSC). The facts are somewhat involved but essentially a second mortgagee accepted a quit claim deed from the borrower and following the commencement of power of sale proceedings another encumbrancer challenged the validity of same. The Court held that where there is an “intervening estate” (i.e. the other mortgage) merger does not occur. In any event the Court declared that the second mortgagee was entitled to proceed with the sale.

Fixtures

While vendor liens and mortgage merger issues rarely arise disputes over fixtures are consistently causing headaches for purchasers and their lawyers. Ownership of the furnace, air conditioner or any other fixture for that matter cannot be assumed and we need to take a look at thePersonal property Security Act R.S.O. 1990 c. P.10.

We should start with Section 34 which provides as follows:

. “Fixtures

34. (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.

Exceptions

(2) A security interest mentioned in subsection (1) is subordinate to the interest of,

(a) a subsequent purchaser for value of an interest in the real property; or

(b) a creditor with a prior encumbrance of record on the real property to the extent that the creditor makes subsequent advances,

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if the subsequent purchase or subsequent advance under a prior encumbrance of record is made or contracted for without knowledge of the security interest and before notice of it is registered in accordance with section 54.

Removal of collateral

(3) If a secured party has an interest in a fixture that has priority over the claim of a person having an interest in the real property, the secured party may, on default and subject to the provisions of this Act respecting default, remove the fixture from the real property if, unless otherwise agreed, the secured party reimburses any encumbrancer or owner of the real property who is not the debtor for the cost of repairing any physical injury but excluding diminution in the value of the real property caused by the absence of the fixture or by the

necessity for replacement. “

So, to put that simply, the section tells us that a security interest takes priority over interests in real property which exist before the goods become fixtures and further, priority over interests arising after the goods became fixtures except where the security interest has been acknowledged in writing or a disclaimer as to an interest in the

fixtures. It then proceeds to inform us that the security interest would not enjoy priority over a purchaser for value without knowledge of the security interest and before notice was registered in accordance with Section 54. We should then look at that section which provides as follows:

Notice in land registry office

54. (1) A notice of security interest, in the required form, may be registered in the proper land registry office, where,

(a) the collateral is or includes fixtures or goods that may become fixtures or crops, or minerals or hydrocarbons to be extracted, or timber to be cut; or

(b) the security interest is a security interest in a right to payment under a lease, mortgage or charge of real property to which this Act applies. R.S.O. 1990, c. P.10, s. 54 (1); 1998, c. 18, Sched. E, s. 198 (1).

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(2) Where the collateral is consumer goods, a notice registered under clause (1) (a) or an extension notice registered under subsection (3), as the case may be, shall set out an expiration date, which date shall not be later than the fifth anniversary of the date of registration and the notice or extension notice is effective until the end of the expiration date.

Idem

(3) A registration to which subsection (2) applies may be extended before the end of the registration period by the registration of an extension notice. R.S.O. 1990, c. P.10, s. 54 (2, 3).

Discharge

(4) A notice registered under subsection (1) may be discharged or partially discharged by a certificate in the required form and the certificate may be registered in the proper land registry office. R.S.O. 1990, c. P.10, s. 54 (4); 1998, c. 18, Sched. E, s. 198 (2).

Clearly then if we find such a registration on title a purchaser under power of sale will have notice of the security interest and will not enjoy the exemption provided for in Section 34(2)(a). Such interests will have to be discharged by the mortgagee from the proceeds of sale.

The other problem is that it may be that the security interest attached prior to the mortgage being enforced in which case it will enjoy priority over the mortgage in any event. A good discussion of the priority of security interests in fixtures is set out in a paper dated April 18th2012 presented by Joe Conte of Pallett Valo LLP entitled “PPSA Issues and Real Estate – Priorities and Enforcementat the 9thAnnual Real Estate Law Summit provided by the Law Society of Upper Canada. As Mr. Conte points out in his paper, conducting a PPSA search may very well be providing your client with notice of a security interest thereby losing the benefit of section 34(2)(a). However, if the security interest enjoys priority over the mortgage which is being enforced it should be

discharged. It is also the case that in some instances conditional sales contracts will contain wording to the effect that until payment is made in full the furnace, air

conditioner or other item does not become a fixture. Removal of fixtures pursuant to Section 34(3) is also a risk where the security interest enjoys priority and, I suggest, where it is deemed not to be a fixture at all. The issue of priorities between fixtures and

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real property in a power of sale transaction was raised inG.M.S. Securities v. Rich-Wood Kitchens 1995 CanLII 528 (ON CA)which is mentioned in the above noted paper. Rich-Wood was only claiming $5,000.00 out of proceeds of sale of $140,000.00 but notwithstanding the modest amounts involved this ended up in the Ontario Court of Appeal. A matter of principle no doubt! In any event the facts, briefly, were that National Trust enjoyed priority over the security interest (for kitchen cabinets supplied by Rich-Wood) because it had advanced funds prior to same arising. G.M.S. then advanced funds under a second mortgage without notice of Rich-Wood’s interest. National Trust then advanced further funds under its first mortgage. The Court of Appeal noted a “circular priority problem” because of the conflict between provisions of thePersonal Property Security Act,theMortgages Act or theRegistry Act. With all due respect to the Court, it seems that with a slight of hand, it was able to determine

priorities without offending the concept that National Trust should enjoy priority for its advances over the G.M.S. mortgage and concluded that when National Trust sold the real property pursuant to its power of sale it had “converted” Rich-Wood’s right to

remove the fixtures pursuant to Section 36(4) and should be responsible for payment of Rich-Wood’s claim.

Another decision of interest isCredit Union Central of Ontario Limited v. Fibratech Manufacturing Inc 2008 CanLII 70243 (ON SC). This dealt with competing claims to priority between a first mortgagee who was owed approximately $1.73 million and a municipality with a tax arrears account of about $2 million. The Receiver appointed under theBankruptcy & Insolvency Act R.S.C. 1985was liquidating real property including machinery and equipment. It was the priority over the machinery and

equipment which was in dispute. After some analysis the Court held that the Municipal Actdid not, as argued by the municipality, create a “special lien” over the machinery and equipment and therefore the Credit Union enjoyed priority. The Court said at one point:

“What is or is not to be regarded as a fixture is a problematic issue that has confounded the law for decades”

How true! Purchasers and their lawyers need to be on guard to address the issue of what fixtures are included and form part of the real property and if there are priority issues to consider when purchasing under power of sale.

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Canada revenue Agency – Super Liens!

Perhaps one of the most disconcerting issues which must be addressed when dealing with power of sale transactions is the so-called “super lien” enjoyed by Canada

Revenue Agency. This is particularly true when dealing with commercial or retail property. Although it was only a Motion for Summary Judgment the decision in MCAP Corporation v. Hunter 2005 CanLII 47759 (ON SC)is most helpful in reviewing this topic. The facts were that the borrower had failed to remit GST and employee deductions relating to his business and were monies outstanding at the time he obtained a mortgage advance. CRA subsequently filed Writs of Execution. Following default under the mortgage MCAP started power of sale proceedings and CRA was served with a Notice of Sale. It would seem at first glance that the CRA executions would rank subsequent to the mortgage but it claimed priority because of section 227(4) of theIncome Tax Act, section 222(1)Excise Tax Act, section 23(3)Canada Pension Plan Actand section 86(2)Employment Insurance Act all of which provide a “super priority” over other interests. I won’t set out all those sections for the reader but of particular note is section 2201 (referred to in the decision as section 2001) of the

Income Tax Regulationswhich provides as follows:

2201.(1) For the purpose of subsection 227(4.2) of the Act, “prescribed security interest”, in relation to an amount deemed by subsection 227(4) of the Act to be held in trust by a person, means that part of a mortgage securing the

performance of an obligation of the person, that encumbers land or a building, where the mortgage is registered pursuant to the appropriate land registration system before the time the amount is deemed to be held in trust by the person.

So, while the mortgagee’s lawyer had conducted the usual searches and found the executions it was wrongly assumed that the mortgage took priority. The Court found that notwithstanding that the executions were filed after the date of registration of the

mortgage CRA’s claim actually enjoyed priority. That is because amounts owing are deemed to be trust monies and CRA can assert its claim against all assets of the debtor. The problem then is that lawyers for mortgagees selling and lawyers for

purchasers buying under a power of sale should obtain written confirmation from CRA that it does not assert priority. We cannot assume that the executions will be cut out under the power of sale simply because they were filed after the date of the mortgage. We need to know that the mortgage was registered and funds advanced before default.

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Leases – Commercial

Where a purchaser is acquiring commercial or retail property pursuant to a power of sale it should be remembered that the priority of commercial leases depends upon which was created first the lease or the mortgage. If the lease is created before the mortgage it enjoys priority but if the mortgage is created before the lease then the lease is subject to the priority of the mortgage. However, in some cases the mortgagee will postpone its rights in favour of the commercial tenant. Clearly, a tenant who spends thousands of dollars on improvements will not be willing to enter into a lease which could be terminated by a mortgagee following default by the landlord/borrower. So, in order to establish whether a property is being purchased subject to or free of

commercial leases a purchaser will need to review the appropriate documentation and obtain written acknowledgments from the tenant and mortgagee to clarify the status and state of account under the lease. For a discussion of this issue the reader may wish to refer to1420111 Ontario Limited v. Paramount Pictures (Canada) Inc 2001 CanLII 28017 (ON SC)

Leases – Residential

A person who obtains title to a residential complex pursuant to power of sale ( or foreclosure) is deemed to be a landlord under the tenancy agreement by virtue of Section 47 (1) of theMortgages Act R.S.O. 1990 c. M.40. Subsection (3) further provides that the deemed landlord is subject to both the tenancy agreement and the

Residential Tenancies Act, 2006 S.O.2006,chapter 17.

Section 37 of that Act provides that residential tenancies can only be terminated in accordance the Act and sections 59 through 68 set out the specific grounds for such termination which include non-payment of rent, illegal acts and so on. Clearly, clients purchasing rental property need not only secure copies of all tenancy agreements and obtain tenant acknowledgments but be aware that he or she will be subject to the regime laid out in theResidential Tenancies Act.

Tenant Deposits

Coupled with the above discussion we also need to consider the priority of tenant

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Residential Tenancies Act, 2006S.O. 2006, chapter 17. However, the decision is still instructive in what it had to say about the conflict between tenancy legislation and the provisions of theMortgages Act.After reviewing the relevant sections of both statutes and a number of decisions the Court concluded that tenants are entitled to the benefit of security deposits paid to the former owner and are to be credited to the tenant’s last month rent. The effect then is that a purchaser buys subject to the tenant’s right to the benefit of a prepaid security deposit and will have to absorb same if appropriate

adjustments are not made on closing. In theTop Linktransaction the purchaser was only given credit on closing for security deposits paid to the mortgagee in possession and not those paid to the original borrower/landlord. One final point to be made on this issue is that prepaid rent is not treated in the same manner as security deposits. In the former the tenant assumes a risk that a change of ownership may occur before the due date of the prepaid rent. This was clarified inCavell v. Canada Dry Giner Ale Ltd [1945] O.W.N. 799 (Co. Ct.)which was cited in theTop Linkdecision.

Planning Act

The last issue is not really one of priorities but relates to a mortgagee’s obligation to comply with thePlanning Actwhen selling under power of sale. This issue was the central problem inWhite v. Daffern 2001 CanLII 28003 (ON SC)where Royal Life Insurance Company of Canada became the mortgagee of thirteen parcels of land and purported to sell some of the parcels to various purchasers including four such parcels to the plaintiff. Unfortunately, this was an action brought by the plaintiff against the solicitor who represented them on these purchase transactions. One of the questions central to the action was to determine if the solicitor had adequately considered if there were anyPlanning Actconcerns and this Motion was brought to answer that question. Royal Life had not obtained consents to sever and sell part of the mortgaged lands and ran afoul of section 50(18) of thePlanning Actwhich states as follows:

Foreclosure or exercise of power of sale

(18) No foreclosure of or exercise of a power of sale in a mortgage or charge shall have any effect in law without the approval of the Minister or of the council

authorized to give a consent under section 53, as the case may be, other than a council authorized to give a consent pursuant to an order under section 4, unless all of the land subject to such mortgage or charge is included in the foreclosure or exercise of the power of sale, but this subsection does not apply where the land foreclosed or in respect of where the power of sale is exercised comprises only,