Alisha Parmar
Monday, April 27th, 2015    Posted by Alisha Parmar (posts) and Shafik Bhalloo (posts)
Alisha Parmar
Alisha comes to Kornfeld LLP from University of British Columbia as an Articling Student. Her primary area of interest lies in: general corporate commercial law.
Shafik Bhalloo
Shafik Bhalloo has been a partner of Kornfeld LLP since 2000. His practice is focused on labour and employment law, and on commercial and civil litigation. He is also an Adjudicator on the Employment Standards Tribunal and an Adjunct Professor in the Faculty of Business Administration at Simon Fraser University.

The Potter Decision – When an Administrative Suspension Goes Too Far

 

By Alisha Parmar and Shafik Bhalloo

 

The Potter Decision – When an Administrative Suspension Goes Too Far

Constructive dismissal is a fascinating concept for employment lawyers, employees, and employers alike.   When an employer is found to have “constructively dismissed” an employee, it means that the law characterizes the employer’s conduct as amounting to dismissal.  Whether or not the employer intended to dismiss the employee, a finding of constructive dismissal can have significant consequences – an offending employer will be liable for damages in lieu of the notice that ought to have been provided to the employee when she was dismissed.   Thus, it seems all the more important that the law governing this legal creature be well-defined, lest an unwitting employer accidently “dismiss” an employee. 

In Potter v. New Brunswick Legal Aid Services Commission, 2015 SCC 10 (“Potter”), the Supreme Court of Canada recently provided an in-depth examination of how the test for constructive dismissal is to be applied and the rules of evidence for each branch of the test.  Further, in the context of administrative suspensions, the decision explicitly recognizes that an employer must provide legitimate business reasons for suspending an employee – otherwise the employer might be constructively dismissing the employee.

As background, an administrative suspension is the broad ability of an employer to temporarily discontinue an employee’s work in a non-union workplace for administrative reasons.[1] This stands in contrast to a suspension for disciplinary reasons.  Further, in this case, the administrative suspension was not for administrative reasons unrelated to the employee’s conduct.  To clarify, the reason for an administrative suspension may be that there is an economic downturn or something else unrelated to the employee – this was not the case in Potter.[2]

The Two Branches of the Legal Test for Constructive Dismissal

Previously, in Farber v. Royal Trust Co., [1997] 1 SCR 846 (“Farber”), the Supreme Court of Canada had held that:

A constructive dismissal occurs where an employer makes a unilateral and fundamental change to a term or condition of the employment contract without providing reasonable notice of that change to the employee.[3]

In Potter the Court further recognized that there are two branches of the test for constructive dismissal.  First, the employee may demonstrate that the employer breached an express or implied term of the contract and then show that the breach was serious enough to constitute constructive dismissal.[4]  The majority explained that a sufficiently serious breach is one which “substantially alters an essential term of the contract” or evinces an intention on the part of the employer to no longer be bound by the contract.[5]  As explained in Farber, this involves asking the question whether a reasonable person in the same situation as the employee would feel that the essential terms of the contract were altered.[6]

Under the second branch, the employee may prove more generally that the employer intended not to be bound by the employment contract, even without showing that there was a breach of a specific term.[7]  This branch takes a retrospective look at whether the employer’s cumulative past acts evince an intention to no longer be bound by the contract.[8]  The question under this branch is whether a reasonable person in the position of the employee, in light of all the circumstances, would conclude that the employer no longer intended to be bound by the contract.[9]

Constructive Dismissal in the context of an Administrative Suspension

Notably, the majority explained that under the first branch in the case of an administrative suspension, the burden shifts to the employer to show that a breach of the employment contract has not occurred.[10]  In order to do this, the employer must show that there were legitimate business reasons for the suspension:

In my view, legitimate business reasons constitute a requirement for a finding that an administrative suspension based on an implied authority to suspend is not wrongful.  Other than in the context of a disciplinary suspension, an employer does not, as a matter of law, have an implied authority to suspend an employee without such reasons.  Legitimate business reasons must always be shown, although the nature or the importance of those reasons will vary with the circumstances of the suspension.[11]

Thus, without legitimate business reasons for the administrative suspension, the employer fails the first part of the test, and the analysis moves onto whether the unauthorized suspension constitutes a substantial breach.  This involves considering whether a reasonable person in the employee’s circumstances would have perceived, inter alia, that the employer was acting in good faith to protect a legitimate business interest, and that the employer’s act had a minimal impact on her in terms of the duration of the suspension.[12]

Application to the Facts

In Potter, the plaintiff employee was appointed the Executive Director of the New Brunswick Legal Aid Services Commission for a seven year term.  About half-way into the term, the plaintiff and the defendant began negotiating for a buyout of the plaintiff’s employment contract.  However, prior to the conclusion of these negotiations, the plaintiff delegated his responsibilities to another director and went on medical leave.

Following this, the defendant unilaterally decided to put a deadline on the buyout negotiations.  If the negotiations were not resolved prior to a certain date, the defendant’s plan was to make a request to the Lieutenant-Governor in Council to revoke the plaintiff’s appointment for cause.  A week before the plaintiff was scheduled to return from medical leave and unbeknownst to the plaintiff, a letter was sent to the Minister of Justice by a representative of the defendant requesting that he be dismissed for cause.  On the same day, the defendant’s solicitor sent the plaintiff’s solicitor a letter which effectively placed the plaintiff on an indefinite administrative suspension without any explanation, but with pay.  Meanwhile, the defendant designated a replacement for the plaintiff.  Two months after being suspended, the plaintiff commenced an action for constructive dismissal.  The defendant contended that by commencing the action the plaintiff had voluntarily resigned, and stopped paying his salary and benefits.

The majority analyzed the facts in Potter using the first branch of the test for constructive dismissal and held that the defendant had in fact constructively dismissed the plaintiff. 

Under the first step, the majority found the defendant did not have express or implied authority to suspend the plaintiff.  The reasons for this finding included the fact that the suspension was of indefinite duration, the defendant had failed to act in good faith, and that it had concealed the intention to have the plaintiff’s employment terminated.[13]  The majority pointed out that as the analysis under this step was conducted from an objective point of view, it was appropriate to consider the letter sent on behalf of the defendant to the Minister of Justice requesting the plaintiff’s dismissal.

The majority further accepted, under the second step, that a reasonable person in the position of the plaintiff would view the breach as substantial, despite the fact the defendant continued to pay the plaintiff.  The defendant had a duty to provide the plaintiff with work, and moreover the suspension was neither reasonable nor justified, since inter alia, no reasons were provided to the plaintiff.[14]  However, the majority emphasized that at this point in the test, it was not appropriate to consider the letter requesting the plaintiff’s dismissal, because it was completely outside the realm of the plaintiff’s knowledge at the time.[15]

Conclusion

There a number of important takeaways in this decision:

  1. Acting within the confines of the employment contract:  Where an action is not expressly authorized by the employment contract, a careful analysis should be conducted as to whether the action is impliedly authorized or consented to by the employee – if not, the employer runs the risk of having constructively dismissed the employee.
  2. Legitimate business reasons:  Employers do not have the implied authority to place an employee on non-disciplinary administrative suspension without legitimate business reasons.  If the employer desires to have this ability, it should be provided in the contract.
  3. Continuing to pay is insufficient:  There is a duty for employers to continue to provide work.  When this duty is interfered with, continuing to pay the employee may be insufficient to show that the employee was not constructively dismissed.



[1] Potter v. New Brunswick Legal Aid Services Commission, 2015 SCC 10 (“Potter”) at para. 68

[2] Ibid at paras. 69 -70

[3] Farber v. Royal Trust Co., [1997] 1 SCR 846 (“Farber”) at para. 34

[4] Potter, supra note 1 at para. 32

[5] Ibid at para. 34 to 35

[6] Ibid at para. 26

[7] Ibid at para. 33

[8] Ibid at para. 33

[9] Ibid at para. 42

[10] Ibid at para. 41

[11] Ibid at para. 98

[12] Ibid at para. 45

[13] Ibid at para. 46

[14] Ibid at para. 81, 99

[15] Ibid at para. 63

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Posted by Alisha Parmar (posts) and Shafik Bhalloo (posts) | Filed under Labour & Employment | ...
Herb Silber, Q.C.
Wednesday, March 25th, 2015    Posted by Herb Silber, Q.C. (posts)
Herb Silber, Q.C.
Herb Silber, QC brings a strong combination of experience, knowledge and empathy to the arbitration process as Arbitrator or Counsel. Herb’s approach creates the positive, respectful atmosphere critical to a successful arbitration process.

This topic can be divided into two parts – research of the facts and research of the law. This comment will focus on whether an Arbitrator can conduct independent research of the facts outside of the evidence presented at the Arbitration.

The British Columbia Court of Appeal has recently addressed this issue in a criminal case, R. v. Bornyk 2015 BCCA 28. I believe the Court’s findings are instructive for arbitration as well. In this case, the trial judge did his own reading of expert articles on the reliability of finger print evidence, which was key to the finding of guilt or innocence and concluded that the expert evidence presented by the prosecution was not reliable. The Appeal Court admonished the trial judge for doing so and overturned the not guilty verdict. The Court noted that ‘ It is basic to trial work that a judge may only rely upon the evidence presented at trial, except where judicial notice may be taken…” (which can only arise in exceptional circumstances where there is indisputable accuracy of the assertion, such as January 1, 2015 fell on a Thursday). The Court went on to state:

“[11] By his actions, the judge stepped beyond his proper neutral role and into the fray. In doing so, he compromised the appearance of judicial independence essential to a fair trial. While he sought submissions on the material he had located, by the very act of his self-directed research, in the words of Justice Doherty in R. v. Hamilton (2004), 189 O.A.C. 90, 241 D.L.R. (4th) 490 at para. 71, he assumed the multi-faceted role of ‘advocate, witness and judge’.”

As noted in the passage above, even where the trier of fact gives the parties an opportunity to make submissions on the factual findings made by relying on extrinsic evidence that is not sufficient as it ultimately for the trier of fact to ensure a fair trial, in this case not introducing evidence on his own initiative.

The Arbitrator must also conduct a ‘fair hearing.” One distinction between an arbitrator and a trial judge is that Arbitrators are often chosen because of their particular knowledge or expertise in an area and it may be reasonably expected by the parties that the Arbitrator will not ignore this expertise. However, general knowledge of the industry is not a substitute for the requirement that evidence on a specific matter ought to be expected to be presented by one or other of the parties so the other party has an opportunity to test the proposition on cross examination or respond with their own evidence. Given the requirement to conduct a fair hearing and to avoid being the “advocate, witness and judge”, it is best practice, in my view, for the Arbitrator to tread carefully on assumptions he or she makes based on their “general knowledge” of an industry and when in doubt, offer the parties the opportunity to address the issue if they choose to do so by the parties presenting evidence.

One area that an arbitrator can initiate a process is to order a view or inspection of property (see Section 29 (1) (d) of the BCICAC Rules). Thus if the Arbitrator concludes, as an example, where value is in issue, that he or she wishes to view a real property after hearing evidence in connection with the same, the appropriate practice, in my view, is for the Arbitrator to give notice to the parties of his or her desire to view or inspect the property. At that point an Order should be made to that effect, notice of the date and time of attendance given to the parties so that the parties and their representatives may be present, and given an opportunity to provide comments when the view or inspection takes place.

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Jennifer MacGregor-Greer
Monday, March 9th, 2015    Posted by Jennifer MacGregor-Greer (posts)
Jennifer MacGregor-Greer
Jennifer MacGregor-Greer is a senior associate with a broad corporate, securities and business transactions practice.

In a previous article, we considered some of the situations in which a closely-held company might wish to expand its board.  This article will go on to consider how to identify possible board candidates.

Selecting board candidates is a process not to be taken lightly.  A company’s directors are responsible for setting its direction and maintaining its corporate governance standards – so the composition of a company’s board can have long-term implications.  If you simply plan to formalize an existing mentorship or adviser role, or if a large investor has negotiated a board seat as one of its investment conditions, you may know already who the director candidate is.  However, in all other cases, identifying suitable candidates is an important step.

The basic requirements for eligibility as a director under the Business Corporations Act (British Columbia) are that the director candidate:

  • is at least 18 years of age;
  • has not been found by a court to be incapable of managing his or her own affairs;
  • is not an undischarged bankrupt; and
  • has not been convicted of an offence in connection with the promotion, formation or management of a corporation or unincorporated business, or an offence involving fraud, with a few exceptions (including the person having received a pardon under the Criminal Records Act (Canada)).

Directors of BC companies are not required to be Canadian residents.  This is, however, not the case for corporations organized under the Canada Business Corporations Act, which requires 25% of a corporation’s directors to be Canadian residents.

Directors are also not required by statute to be shareholders of a company.  However, your company’s Articles may require directors to hold shares.  It is important to review your Articles to determine whether this is the case.

You may next wish to consider the strengths and weaknesses of the existing directors.  If the company’s founder is its sole director, typically that person may have industry expertise, but lack other skills – for instance, a high degree of financial literacy.  In other cases, especially if the founder is a serial entrepreneur, the founder may have excellent business skills but wish to add industry knowledge.  Since the board will set the company’s direction, oversee its finances and safeguard its governance practices, having the necessary skill set to do so is critical.

Another item to consider is your company’s goals and objectives.  Are you hoping to build a particular line of business in the next few years?  It may be useful to have a director who is knowledgeable about that line of business.  Are you intending to enter a certain market?  Having a director who knows the particular issues surrounding that market could be a determining factor in your success.

Finally, you may wish to consider independence and gender diversity when building your board.  Board independence has long been a requirement for public companies, and gender diversity is quickly becoming an important element in corporate governance best practice.  While securities laws require boards of public companies to consist of a majority of independent directors (i.e. directors who are not related to the management of the company and who have no other material relationship with the company), best practices for private issuers also require a meaningful number of independent directors.  Canadian securities regulators have also recently brought into effect “comply or explain” standards that require reporting issuers to disclose recruitment of women directors, and if no such recruitment has occurred, to explain why not.  While these diversity standards currently do not apply to companies that are not reporting issuers, it is reasonable to expect a trickle-down effect whereby investors in smaller companies will begin to demand a higher rate of diversity on boards.

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Posted by Jennifer MacGregor-Greer (posts) | Filed under Corporate Governance | ...
Jennifer MacGregor-Greer
Tuesday, March 3rd, 2015    Posted by Jennifer MacGregor-Greer (posts)
Jennifer MacGregor-Greer
Jennifer MacGregor-Greer is a senior associate with a broad corporate, securities and business transactions practice.

Many companies start their lives as closely-held entities with few shareholders and only one director, who is often the company’s founder and/or principal shareholder. However, as your company grows you may find that you feel uncomfortable being the sole decision-maker, or that others are asking you to add more directors.

Of course, if your company is a closely held family business, or if you are a sole shareholder, there may never be a need to bring on additional directors. The role of a company’s directors, according to the Business Corporations Act (British Columbia), is to “manage or supervise the management of the business and affairs of the company.” If the nature and extent of your company’s business is such that this role can be carried out effectively by a single director, having one director may be sufficient. But if it appears that this role can no longer be adequately fulfilled by a single director, it is time to consider your options. The following are some situations where it may be in the company’s best interest to appoint additional directors:

  • The company is seeking to attract large investors who wish to have a formal role in influencing corporate direction;
  • The company is expanding either geographically or by adding new business divisions, making it desirable to add a diversity of expertise to the board;
  • The company’s business is becoming more complex, making it desirable to add a range of skill sets (such as financial, legal, or industry-specific) to the board;
  • You wish to formally recognize a mentorship or advisory role by appointing a mentor or adviser to the board;
  • Your company’s Shareholders’ Agreement requires multiple directors;
  • You wish to add independent, objective viewpoints to the board; or
  • The company intends to become a reporting issuer under relevant securities law, making it necessary to raise its corporate governance standards in order to comply with best practices.

While having multiple directors generally enhances the governance of a company, this will only be the case if the directors are sufficiently knowledgeable and have the necessary skills to understand the company’s business and effectively carry out their roles. Other limitations to keep in mind include the following:

  • It is generally advisable to have an odd number of directors rather than an even number, since, depending on the company’s Articles, in many cases board decisions are made by a majority of directors. Having an odd number eliminates the uncertainty that could occur if a board decision is split 50/50.
  • The number of directors that your company may have might be limited by the provisions of your company’s Articles. It is worthwhile checking the Articles to determine if they contain any restrictions in this regard, and whether your Articles need to be amended before appointing additional directors.
  • Typically, directors are elected by the shareholders of the company who hold shares that carry voting rights. Depending on the number of shareholders in your company, it might be necessary to hold a shareholders’ meeting at which the new directors are elected.
  • If a company has too many directors, the governance benefits experienced by having a diverse board could be hampered by inefficiency. In all but the largest companies, typically it is not necessary to have more than five directors.

In a future article, we will consider the types of individuals you may wish to appoint as directors.

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Dan Hepburn
Friday, February 6th, 2015    Posted by Dan Hepburn (posts) and Alisha Parmar (posts)
Dan Hepburn
Dan maintains a general civil litigation practice with a particular focus on business disputes, lease disputes (both commercial tenancy and the lease of goods and machinery), employment law, debt collection, disputed estates and insurance law.
Alisha Parmar
Alisha comes to Kornfeld LLP from University of British Columbia as an Articling Student. Her primary area of interest lies in: general corporate commercial law.

It is rare that a reasonably straightforward statutory provision receives consideration by the Court of Appeal three times within little more than a decade. Section 73 of the Land Title Act RSBC 1996 c.250 (“LTA”) is such a provision. Those inclined to technical arguments may protest this hat-trick was actually a joint effort between section 73 and section 73.1, since the decision of International Paper Industries Ltd. v. Top Line Industries Inc., 1995 BCCA 2305 (“Top Line”) resulted in the enactment of section 73.1, which modified the effect of section 73. Nevertheless, this article provides an overview of the decisions in this saga and concludes with some practical comments.

Section 73 and Top Line

Our discussion begins with section 73 of the LTA, a section which, prior to 1996, received scant consideration from the Courts. Section 73 is reproduced in full below:

73

(1) Except on compliance with this Part, a person must not subdivide land into smaller parcels than those of which the person is the owner for the purpose of

(a) transferring it, or

(b) leasing it, or agreeing to lease it, for life or for a term exceeding 3 years.

(2) Except on compliance with this Part, a person must not subdivide land for the purpose of a mortgage or other dealing that may be registered under this Act as a charge if the estate, right or interest conferred on the transferee, mortgagee or other party would entitle the person in law or equity under any circumstances to demand or exercise the right to acquire or transfer the fee simple.

(3) Subsection (1) does not apply to a subdivision for the purpose of leasing a building or part of a building.

(4) A person must not grant an undivided fractional interest in a freehold estate in land or a right to purchase an undivided fractional interest in a freehold estate in land if the estate that is granted to or that may be purchased by the grantee is

(a) a fee simple estate on condition subsequent, or

(b) a determinable fee simple estate

that is or may be defeated, determined or otherwise cut short on the failure of the grantee to observe a condition or to perform an obligation relating to a right to occupy an area less than the entire parcel of the land.

(5) Subsection (4) does not apply to land if an indefeasible title to or a right to purchase an undivided fractional interest in

(a) a fee simple estate on condition subsequent in the land of the kind described in subsection (4), or

(b) a determinable fee simple estate in the land of the kind described in subsection (4)

was registered before May 30, 1994.

(6) An instrument executed by a person in contravention of this section does not confer on the party claiming under it a right to registration of the instrument or a part of it.

Top Line was the innocuous case that started it all. Prior to this case, it was generally accepted (or, as it turns out, assumed) that section 73 of the LTA meant leases longer than three years of unsubdivided parcels of land were unenforceable except as against the parties to the lease. That is, although the tenant was unable to register her interest under the lease at the Land Title Office, she would still have personal rights and obligations as against the landlord and vice versa.

In Top Line, the landlord and tenant executed a lease of unsubdivided land for a term of nearly five years, with a further option to renew. Like so many others, this lease was prepared without legal advice and neither party was aware of section 73. The matter was brought before the courts when the tenant decided to exercise its option to renew the lease and the landlord refused to allow the renewal.

The tenant argued that the lease and option to renew should be declared valid and enforceable between the parties, while the landlord contended that section 73 applied to nullify the lease. Interestingly, the lease had been the subject of earlier litigation and this was the first time the landlord was raising illegality under section 73 as an issue. The BC Supreme Court agreed with the tenant and found that section 73 allowed the lease to be enforceable as between the parties, including the renewal option.

However, the landlord successfully appealed the decision. The Court of Appeal held that the public policy behind section 73 was undermined by permitting in personam rights to be created via illegal leases. The public policy identified by the Court included protecting the Torrens land registration system and ensuring that municipal authorities retained control over subdivision.[1] As a result, Newbury JA held that the lease in Top Line was unregistrable, unenforceable (even between the parties to the lease), and invalid from the outset.

Section 73.1 and Idle-O No.1

The Court of Appeal’s ruling in Top Line came as a great surprise to real estate lawyers and industry and likely affected thousands of British Columbia leases in existence at the time. While abject panic may not have been the correct word to describe the reaction, it is safe to say that the decision in Top Line created great uncertainty and left many longstanding commercial relationships suddenly without any legal protection. This form of unregistered leases of unsubdivided land was particularly common in the agricultural sector, where plots of land and orchards had been leased out by farmers for decades if not generations in this manner.

The concern within the legal profession over the Court of Appeal’s decision in Top Line was such that the British Columbia Law Institute (“BCLI”), a non-profit society dedicated to law reform projects composed of notable lawyers and legal scholars, released a consultation paper titled “Leases of Unsubdivided Land and the Top Line Case”[2] calling for submissions from the profession. Common criticism of Top Line was summarized on page 4 of the consultation paper as follows:

The most commonly-heard complaint about the reasoning in Top Line was, as one commentator put it, that “[t]he court overstated the evils which s. 73 seeks to restrain. [citation omitted] Another critic remarked, “[t]here has been no demonstrable harm”[citation omitted] caused by leases in contravention of section 73. The damage has been contained because restrictions on subdivision are not the only tool that local governments have to control real estate development. The forerunner of section 73 was enacted in 1919. Since that time, local governments have imposed numerous licence and permit requirements—such as building permits and business licences—in order to regulate land use and development. In addition, zoning requirements have progressed since 1919. As a result, restrictions on subdivision are no longer the only or even the primary means that local governments have at their disposal to control real estate development.

 

Ultimately, as a result of its consultations and analysis, the BCLI released a report titled: “Report on Leases of Unsubdivided Land and the Top Line Case”[3] (the “BCLI Report”). The BCLI Report recommended an amendment to the LTA and attached a model legislative amendment as a schedule to the report. Importantly, the model amending legislation specifically called for the amendments to the LTA modifying the effects of section 73 to have retroactive effect, protecting existing leases of unsubdivided parcels.

As a result of the BCLI Report and the wide concern voiced by industry and real estate lawyers over Top Line, the Legislature responded by enacting section 73.1. In the second reading of the enacting bill, the Honourable Wally Oppal, then Attorney General of the Province, described section 73.1 and referred to the Top Line decision as follows:

The amendment addresses the side effects of a 1996 decision, a court case that interpreted the act’s requirements on leases on unsubdivided land. The decision has resulted in confusion, extra costs for farmers and an unintended burden on local governments.[4]

Section 73.1 was, as such, specifically in response to the Top Line decision and provided that a lease for a parcel of land is not unenforceable between the parties to it, if the only reason for the unenforceability is noncompliance with section 73 or that the lease is unregistrable. In many respects, section 73.1 went further than the draft legislation recommended by the BCLI, which called for such leases to be deemed licences in land. Importantly, however, section 73.1 did not specifically follow the model form of the legislative amendment recommended by the BCLI and did not clearly set out that the amendment was to have retroactive effect. Whether this was through inadvertence or by design is up for debate. As it turns out, this drafting choice or omission was significant.

Idle-O Apartments v. Charlyn Investments, 2008 BCSC 840 [“Idle-O No. 1”] became the first decision to test whether section 73.1 reversed the effects of Top Line entirely. In Idle-O No.1, the lessor relied on Top Line to seek a declaration that a lease of 998-years was unenforceable for noncompliance with section 73. The lease had been entered into prior to section 73.1 coming into force and, again, the parties had entered into the lease without appreciating the significance of section 73. The key issue in Idle-O No.1 was whether section 73.1 applied retrospectively to cure an illegal lease entered into prior to its enactment.

The BC Supreme Court decided in favour of the lessee, holding that section 73.1 applied retrospectively. The Court, after reviewing the fallout from Top Line, including various criticism of the decision from practitioners and legal scholars, the BCLI Report and the legislative history and debate surrounding the amendment, held that as benefits-conferring legislation the provision intended to “abolish the hardship effects of the Top Line decision”.[5]

The BC Court of Appeal unanimously disagreed with the trial court’s interpretation of section 73.1. In allowing the appeal, the Court held that there “is no basis in law for concluding that the Legislature intended s. 73.1 to have retrospective effect”.[6] The Court stated that the established statutory interpretation principles did not support the lower court’s conclusion, and therefore, the lease was invalid and unenforceable. Since section 73.1 did not clearly indicate retrospective application, it could only protect those leases entered into after May 31, 2007; the day the section came into force.

Idle-O No. 2

While disposing of the issue of retrospective application, the Court of Appeal allowed various alternative claims of the lessee back to the BC Supreme Court for determination.[7] Despite the Court of Appeal’s unfavourable ruling, there seemed to be a glimmer of hope for the lessee. This hope turned out to be well-placed, as in Idle-O Apartments v. Charlyn Investments, 2013 BCSC 2158 (“Idle-O No. 2”), the BC Supreme Court found that proprietary estoppel applied and that a replacement “lease” should be granted.

In a long and carefully crafted decision, Watchuk J explained that it was unconscionable for the lessor to benefit from the lessee’s mistaken belief that it held a valid leasehold interest. The lessee (and lessor) had acted in accordance with the belief that there was a valid lease agreement for over 20 years. In doing so, the lessee had acted to its detriment by making substantial expenditures on the leased property and had missed an opportunity for subdivision, which would have made the validity of the lease a non-issue. Consequently, Watchuk J held that the four main elements for the modern test of proprietary estoppel had been met.

Watchuk J determined that the appropriate remedy under the doctrine of proprietary estoppel was to order the parties to enter into a replacement lease on terms identical to the original lease. Since the new lease was entered into after the enactment of section 73.1, the provision would work to give the lessee in personam rights under the new lease.

Watchuk J asserted that ordering an identical replacement lease did not circumvent the Court of Appeal’s decision nor was it contrary to the public policy behind section 73. The replacement lease was an equitable remedy flowing from the conduct of the parties and not from the original, illegal lease agreement.[8] Watchuk J further held that section 73.1 had clarified the public policy behind section 73 since the Top Line decision, and stated that the public policy applied in determining a remedy should not be restricted to that at the time of the breach, but should instead reflect its state at the time the remedy is issued.[9]

Idle-O No. 2, BC Court of Appeal

The lessor again appealed the decision on a number of grounds. Perhaps surprisingly, the BC Court of Appeal for the most part upheld the decision of the lower court in Idle-O Apartments v. Charlyn Investments, 2014 BCCA 451.

The Court of Appeal held the trial judge was correct in finding that the elements of proprietary estoppel had been met, and proceeded to consider whether ordering a replacement lease was appropriate. Interestingly enough, the Court of Appeal accepted the trial judge’s reasoning that, despite the obvious effect of the order, re-entering the lease was not a retrospective application of section 73.1. The Court held that it was open for the trial judge to fashion such a remedy through proprietary estoppel and commented that:

Indeed even if s.73.1 had never come into existence, it would have been open to the trial judge to fashion an equitable remedy in the form of a “lease” (in reality a court order) that is enforceable only between the parties and which thus poses little danger to third parties relying on the Torrens system of registration.[10]

As a result, the Court approved of the remedy of a replacement lease despite the public policy concerns expressed in Top Line and in the appeal of Idle-O No.1.

However, the Court did find that the remedy fashioned by the trial judge was too broad and was not the “minimum equity necessary to do justice” between the parties.[11] Based on factors external to the parties’ expectations, including, for example, the consideration that the sewage system of the leased property was at capacity, the Court found it appropriate to reduce the duration of the new lease the parties were to enter. Thus, instead of being for 998 years, the replacement lease would only be for the duration of the lives of the current directors of the lessee and those directors’ children.[12]

 

Comments

In conclusion, the above cases provide a broad survey of legal principles which will likely have repercussions outside of the realm of property law. Focussing on the implications for long-term leases of unsubdivided property alone, the decisions have provided some clarity on sections 73 and 73.1 and bring some practical points to the forefront. At an immediate level, the relevance of Top Line will eventually fade with the passage of time and the expiry of all but the most lengthy leases of unsubdivided parcels of land.

Lessors and lessees who entered into long-term lease agreements of unsubdivided land after May 31, 2007 can rest assured knowing that their lease agreements will be upheld as between the parties to the agreement. However, the parties should still be alive to the fact that long-term unregistrable leases do present a host of other issues including enforcing their interests against third parties.

For lease agreements entered into prior to May 31, 2007, those seeking to uphold the lease may be able to rely on equitable grounds, like proprietary estoppel or unjust enrichment, to give effect to the terms of the agreement. As demonstrated in the Court of Appeal’s recent decision in Idle-O No. 2, this does not entail the lease will be upheld on identical terms, and section 73 still renders such leases prima facie unenforceable. Bottom line is that it is still somewhat of an expensive ‘crapshoot’ to rely on the Courts to uphold the original bargain and parties to such leases would be well advised to seek legal advice to protect their interests and investment. In fact, parties would be well served to seek out such advice on a pre-emptive basis before there is any discord in the landlord tenant relationship.

There are also lessons of general interest and application to take from the still ongoing saga of Top Line. While both Top Line and the Idle-O cases impress the importance of being aware of the law prior to entering lease agreements, it is important in this case to acknowledge that at the respective times those leases were entered into it is highly unlikely that even the most thoughtful of real estate lawyers could have predicted the Court of Appeal’s ruling in Top Line.

What is also somewhat surprising to the authors about the Court of Appeal decisions in Idle-O No 1. and No. 2 is that the Court did not choose to revisit Top Line, but rather approved of a remedy in equity to work around its harsh results. The Court of Appeal’s original decision in Top Line struck a very odd balance between holding parties to their contractual dealings and the purported policy consideration that were relied upon by the Court to justify the harsh effects of the ruling. These purported policy considerations were widely criticized by legal scholars and practitioners and largely debunked by the BCLI Report. Ultimately, the Legislature did not appear to share the Court’s policy concerns.

Ideally, the correctness of Top Line would have been weighed upon by the Supreme Court of Canada as a final arbitrar of the debate. Leave to appeal to the Supreme Court of Canada has not been sought on Idle-O No. 2, however, and the practical relevance of the debate will ultimately be rendered all but moot as time passes.

Lastly, the choice of the legislature to not include clear language giving the amendment retroactive effect only adds to the intrigue of the Top Line saga. The authors are inclined to view the failure of the legislature to give section 73.1 retroactive effect as inadvertent and in error, particularly in light of above comments of then Attorney General Oppal to the Legislature. It is unclear what, exactly, would be served by limiting the remedial effect of the amendment on this basis.




[1] Top Line, at para. 17 and 18

[3] BCLI report no. 39; July 2005

[4] Hansard, 2007: Third Session, 38th Parliament, Volume 20, Number 9 at page 7917

[5] Idle-O No.1, at para. 101

[6] Idle-O Apartments v. Charlyn Investments, 2010 BCCA 460 at para. 4

[7] Ibid at para. 38

[8] Idle-O No.2 at para. 184

[9] Idle-O No.2 at para. 186

[10] Idle-O Apartments v. Charlyn Investments, 2014 BCCA 451 at para. 68

[11] Ibid, at paras. 83 to 86

[12]Ibid, at para. 85

Posted by Dan Hepburn (posts) and Alisha Parmar (posts) | Filed under Real Estate Law | ...