Posts by Dan Hepburn

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 joined Kornfeld LLP as an associate in 2015 after completing her articles with the firm.

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 | ....