Property Law and the Law of Contract 4.1 CHAPTER 4 PROPERTY LAW AND THE LAW OF CONTRACT SOURCES OF LAW AND THE LAW OF PROPERTY This chapter will review from a legal point of view the various interests in land that are relevant to a mortgage lender. While this chapter is not intended to be an exhaustive study, some familiarity with the legal environment is essential to both borrowers and lenders. As well, the various land registration systems are summarized to establish the rules regarding priority of charges. THE SOURCES OF OUR LAWS "Law" can be defined as the enforceable body of rules which governs a society. In Canada, (with the exception of Quebec), our law comes from two sources: common law and statute law. These two sources of law are briefly discussed below. Common Law Common law refers to court-based, judge-made law. Common law derives its authority from historical customs and the decisions of judges originally settling disputes between people in accordance with these social customs. Our common law system originated in England many hundreds of years ago and evolved during the first three centuries after the Norman Conquest of England in 1066 AD. This English common law was introduced into British Columbia and the other provinces during England's colonization of Canada. Today, in Canada and BC, common law continues to develop and evolve. An important concept in our common law system is the doctrine of stare decisis. This doctrine, developed in England, gives our law security and certainty. Stare decisis is a Latin phrase which means "let the former decision stand". This principle was adopted by the early common law judges so that people could predict the consequences of their actions with some certainty. By following earlier decisions dealing with the same problem, the judges created uniformity in the law. Today, if a court has already decided a particu- lar point, and a subsequent court is faced with the same issue, the earlier decision should 4.2 Chapter 4 govern the subsequent decision. This is particularly true when the earlier decision was made by a higher court than the court hearing the subsequent case. The earlier cases which are followed are referred to as "precedents". Applying this doctrine is not as easy as it seems. It is uncommon for courts to be faced with new cases identical to previously decided ones. Therefore, a judge must review all of the facts of a former decision, and decide which of those facts were crucial to the decision. The judge then compares those facts to the facts before the court. If there is a difference which the judge feels is crucial, the judge will "distinguish" the former case and determine it not to be applicable in the circumstances before the court. Under the doctrine of stare decisis, decisions made by the Supreme Court of Canada have the most weight in our law. Next, the decisions of the appeal courts of the various provinces are binding upon the lower courts of those provinces. Such decisions will also be very persuasive to the lower courts of other provinces. Finally, the provincial trial court decisions may govern future decisions on the same points. If no Canadian authority can be found, a judge may refer to English cases or to those from other Commonwealth countries with a common law system. Canadian courts may also refer to American cases, especially for complex or technical commercial issues in which US law may be more developed. In this way, a body of precedent has emerged which may be referred to in any dispute. As the precedents are followed or adapted to new facts, or new precedents are created, the common law continues to evolve. Equity During the reign of the Tudors and Stuarts in England, the common law precedent system became firmly established in English law. In fact, it became so firmly established that the rules became very rigid and inequitable results frequently occurred. As a result, litigants began to petition the king, who was looked to as the source of all legal rights. As the king began to decide cases based upon principles of fairness or "equity", litigants were able to avoid the rule-bound common law courts and petitions to the king to solve disputes became more and more popular. Eventually, the king passed on his function to his chancellor and vice-chancellor and a separate court system administering equitable rules based on fairness was created. These courts were known as the courts of chancery or the courts of equity. The courts of chancery and the common law courts developed separately for hundreds of years until 1873. Joining of the Two Systems In the 1870's the English Parliament passed the Judicature Acts which joined or "fused" the courts of equity with the common law courts. Today, in Canada, the two court systems are also combined; consequently, judges in all the provinces (except Quebec, which operates under a different system of law) can apply both common law and equitable principles in deciding a matter. If there is a conflict between the two, equitable principles take priority. Example George agrees to sell his house to Kevin and Kevin agrees to purchase it. On the day the deal is to be "completed", George refuses to sign the documents to transfer the property, saying he wants more money than he had originally agreed to. Kevin sues George for breach of contract. Under common law, Kevin would only have the remedy of damages. The court would order George to pay Kevin the amount of money it would cost to put Kevin in the position he would have been in if the contract had been performed. But Kevin might want something other than money in his pocket. The courts of equity could grant an equitable remedy such as specific performance, whereby George would be ordered to perform the contract by signing the documents and transferring the property to Kevin. Today, by virtue of the Judicature Act, a judge in British Columbia has the power to grant either common law or equitable remedies. However, because equitable remedies are awarded at the Property Law and the Law of Contract 4.3 discretion of the court, Kevin could be refused specific performance in some cases; if, for example, he delayed too long in bringing his case before the court. Another equitable remedy is the injunction, which is most commonly an order of the court pro- hibiting a defendant from doing or continuing to do an unjust act. A mandatory injunction is an order requiring a defendant to do a particular thing. Today, the expression "common law" can have several meanings. Sometimes it refers to the original set of principles which developed separately from equitable principles. More often it is used very loosely to cover both common law principles and equitable principles as they have developed through decisions of the courts. In this sense, "common law" is contrasted with statute law. Statute Law Statute law, or legislation, is the body of law made by our government representatives in the federal parliament, provincial legislature, or municipal council. The power of the provinces or federal govern- ment to make laws is set out in our constitution. For example, the federal government has exclusive authority to pass legislation dealing with matters which involve banking, bankruptcy, currency, postal services, marriage and divorce, criminal matters, patents, copyrights, shipping, fisheries, and national defence. The provincial government is responsible for property and civil rights, municipal institutions, the administration of justice within the province, education and generally matters of a purely local or private nature. The residual power to legislate over areas not specifically covered is left with the federal government. Municipal governments are not given their authority to legislate under the constitution; instead, specific sections are "carved out" of the provincial power and passed down to the municipalities or cities within the province. These local governments pass bylaws which govern matters within their jurisdiction. For instance, many of our street and traffic regulations and local building bylaws are enacted by local government councils. All three levels of government provide an ever-increasing volume of laws governing our day-to-day activities. The development of new principles using the case law approach is very slow. The role most often played by legislation is to change the common law. For example, there was no requirement at common law for a person acting as a mortgage broker to be registered. That requirement was created by legislation in each province, such as British Columbia's Mortgage Brokers Act, and other provinces have similar statutes. Therefore, in answering a legal question, a judge will first look to see if a statute has been passed which provides an answer. Under the doctrine of stare decisis, the judge will interpret that statute in the same way as courts have done previously. If no statutes exist on the question, the judge will rely on case law alone. Figure 1 illustrates the two sources of laws discussed above. Figure 1: Sources of Our Law COMMON LAW STATUTE LAW •• in present day, includes both common law •• laws passed by federal, provincial, and and equitable principles as evolved from municipal governments case decisions •• federal and provincial powers found in the •• uniformity created as a result of stare decisis constitution (courts follow former similar decisions) •• municipal power carved out of provincial power •• used to change the common law 4.4 Chapter 4 CATEGORIES WITHIN OUR LEGAL SYSTEM There are two major categories into which the different areas of law fall: civil law and public law. In this sense, civil law (or private law) covers those types of law that deal with aspects of relation- ships between individuals that are of no direct concern to the state. For example, a breach of contract, a divorce, or a tort action are civil law matters. Public law, on the other hand, comprises those areas of law that deal with the constitution and bodies of government, the relationship between individuals and the state, and relationships between individuals that are of direct concern to the state. For example, public law includes tax law, constitu- tional law, and criminal law. From the point of view of those involved in the real estate industry, civil law is most important (although in certain cases public law such as the Criminal Code will be relevant), and particularly, the area of real property and mortgage law. Contracts, agency, and tort law are also civil law matters of concern. REAL PROPERTY LAW Historical Basis Due to the unique characteristics of land, a body of legal principles has developed to deal exclusively with real property. These principles come from previous court decisions and current legislation. The historical basis for our real property laws dates back to the Norman conquest of England in the 11th century A.D. After the conquest, William the Conqueror considered himself the owner of all of Eng- land. He divided the land into parcels, and these were given to his barons and knights in return for their assistance in the conquest and for services which they performed for the king. Failure to meet these requirements meant that the land would revert back to the Crown. Through the tenant-in-chief, the rights to the land were further subdivided to middle lords and, finally, to the peasantry who actu- ally occupied and worked the land. As a result, land was not "owned" as we often think of the term; instead, it was held for a period of time (limited or unlimited) in return for the services rendered. Later, these services were changed to a money payment known as scutage. This was known as the feudal system, and the rights acquired by the tenants were referred to as estates. Today, this is (in theory at least) the basis for our land-holding system in Canada where the Crown still possesses the ultimate right to land. Real Property Statutes Because property and civil rights are matters within the jurisdiction of the provinces, legislation deal- ing with real property can vary widely from province to province. For example, the western provinces have a Torrens land title system, while most eastern provinces have a less comprehensive system of title registration. Also, the federal government sometimes has jurisdiction within a province to affect real property in that province, by, for example, expropriating land for federal purposes. LOCALLY SPECIFIC REAL PROPERTY LAWS Because real property falls within provincial jurisdiction, each province has its own set of guiding statutes. While most follow similar general principles, the specific applications vary significantly from province to province. Throughout this chapter and the next we will attempt to generalize these legal principles as far as possible on a national scale. We will provide local examples and highlight regional variations where possible – however, readers must review their local legislation to confirm applicable real property laws in their specific location. Property Law and the Law of Contract 4.5 ESTATES The law of real property in Canada is based on the law of England. When the early settlers arrived, they brought their own English law with them. For example, in BC's Law and Equity Act, R.S.B.C. 1996, c. 253, English laws as they existed on November 19, 1858, became the laws of British Columbia "so far as the same are not from local circumstances inapplicable". The application of this English law can be modified or altered by provincial or federal statutes. As a result, our property law today is dif- ferent in a number of important respects from that in England. Perhaps the most significant difference is the system of land registration that exists in British Columbia. Land registration systems are dealt with in detail later in this chapter. It is important at the outset to distinguish between two types of property, namely, (a) land or real property and (b) personal property. This latter category includes goods and chattels. Historically, real actions could be brought in the courts in respect of land, and personal actions could be brought in respect of other types of property. Therefore, a distinction between real property and personal property was developed by lawyers. Real property generally consists of land and whatever is erected, growing upon or affixed to the land. What is affixed and what is not is explained later in this chapter under "Fixtures and Chattels". Land also includes rights related to the land. Personal property is, in effect, everything else, and it generally includes any right or interest which one has in moveable objects. The fact that our law of real property comes from English law means that we have inherited one of its most fundamental concepts – namely, that land itself is not owned (even though in everyday speech we talk about "owning" land). The land itself is not subject to ownership except by the crown. Instead, the person who has the right to possession is entitled to exercise certain proprietary rights in respect of the land. The only thing that is subject to ownership is an estate in the land. An estate may be conceived of as a bundle of rights held by the owner. In other words, the owner of an estate has certain rights which he or she may exercise over the land. Estates still in existence today are fee simple estates, life estates, estates pur autre vie, and leaseholds. Fee Simple or Freehold Estates A fee simple or freehold estate is what we ordinarily think of as ownership of real property. A fee simple owner has more rights over his or her land than any other owner. Originally, the word "fee" meant that the estate could be inherited and the word "simple" meant that there was no qualification on the type of heir who could inherit. The owner may leave it to others through a will or, if the owner leaves no will, the laws of each province will decide how the property will be divided among the heirs after the owner's death. If no will is made and no heirs can be traced, the property will "escheat" or revert back to the Crown (i.e., the government). A fee simple is also known as a freehold estate. Originally, this meant that the land was held by a free tenant and could be held for an unlimited period of time. Even today, if the "owner" of a fee simple estate pays the taxes and other assessments, he or she may deal with the property in any way he or she wants (subject to certain legislative restrictions). Life Estates and Estates Pur Autre Vie A life estate is simply an estate in land which lasts for the lifetime of the holder, who is called the tenant. Again, it is a freehold estate, but is for an uncertain period of time because it terminates upon the death of the life estate owner. The life estate owner is entitled to the use and possession of the land, and to receive any revenues it may generate. This type of estate is registered as a charge on the fee simple title of the real property. 4.6 Chapter 4 Example Jones wishes to leave his home to his wife for her lifetime and then to his only child in fee simple. His will contained this clause: "To my wife, Clara Jones, for life, with remainder to my son, John Jones". The result of such wording is that upon Jones' death, his wife inherits a life estate, and his son has a fee simple estate in remainder – i.e., after Mrs. Jones' death, the son obtains the fee simple estate in the property. But what happens if, after the death of her husband, Mrs. Jones remarries and decides to live in the home of her second husband? If she disposes of the first property to another person (say, Mrs. Smith), then Mrs. Smith obtains what is known in law as an estate pur autre vie. Or, in other words, an estate based on the life of another person, namely, Mrs. Jones. When Mrs. Jones dies, her son will still inherit the property in fee simple, and Mrs. Smith will be forced to vacate because her estate ended on Mrs. Jones' death. Mrs. Smith could only receive the estate that Mrs. Jones held. Needless to say, life estates are difficult to sell for value because of their uncertain duration. As a result, estates pur autre vie are extremely rare these days. Once a life estate terminates, the fee simple estate from which it was created will do one of two things: if the document that created the life estate has indicated a person who is to inherit the remain- der of the estate, the fee simple will pass to this "remainderman"; if the document creating the life estate has not provided for a remainderman, the remnant of the estate will return to the former owner or to his or her heir, referred to as the "reversioner". Rights and Obligations of the Tenant The tenant is liable for all yearly operational expenses including electricity, water, heat and taxes and for the payment of interest if the property is encumbered by a mortgage (but not the principal amount owing). Naturally, the tenant has the right to use and occupy the real property during his or her life. In short, a tenant may provide for him or herself by using the annual fruits of the property, but must not do any acts which would injure the inheritance permanently (Hiltz v. Langille). Waste The common law recognized three categories of waste: voluntary, permissive and ameliorating. In addition, as explained below, the courts of equity developed a fourth category known as equitable waste. Voluntary waste consists of direct, positive acts which result in damage to the property beyond the use a tenant is entitled to make, as explained above. It would include such things as pulling down a garage or cutting a stand of timber. The tenant is liable to the remainderman or reversioner for this type of waste. Permissive waste consists of allowing a property to deteriorate without any positive acts of the tenant. At common law, a tenant is generally under no obligation to repair or compensate for permis- sive waste. An example of permissive waste would be where a tenant simply allows the building on the property to decay and does nothing to prevent this. Ameliorating waste consists of direct, positive acts which improve rather than destroy the property. Here, the tenant is liable but usually no damages can be awarded as the property has been improved. Often, the person who creates the life tenancy will expressly provide that the tenant is not liable for any waste committed, through the use of a phrase such as: "To A for life without impeachment for waste." It has been held that such an express provision will free a tenant from any liability (from the three types of waste mentioned above) to the remaindermen. However, imagine the result if a tenant who was not liable for waste decided to destroy the build- ings on the property so that the remaindermen would have little or nothing of value to inherit. The courts of equity created a further category of waste known as equitable waste. As a result, even if a life tenancy was created without liability for waste, the tenant would be liable for equitable waste unless the instrument expressly excludes liability for equitable waste. Property Law and the Law of Contract 4.7 Rights and Obligations of the Remaindermen The remaindermen (or reversioners, as the case may be) have the right to receive the fee simple estate in the property after the death of the tenant. This includes the right to have the property pass to them in essentially the same condition as it was originally granted to the tenant, subject to what has been said about liability for waste. To protect their inheritance, the remaindermen must pay the principal on any outstanding mortgage and any insurance premiums. Leasehold Estates This is the estate or legal interest in land which is created between a landlord and a tenant under a contract commonly known as a lease. A leasehold estate is an interest in land for a time – a week, a year, a hundred years or even more. The owner of the land, called a lessor or landlord, grants the property to a lessee or tenant, usually for a sum of money paid periodically and known as rent. As an interest in land, a lease is entitled to the normal priorities over other subsequent interests such as mortgages and of course is subject to other interests having priority over it. The two most important aspects of a lease are the tenant's right to exclusive possession of the property, and the contractual nature of the interest. Residential tenancies are usually highly restricted by provincial statutes. Provincial legislation usually affects commercial tenancies, but the common law largely prevails. The provisions of the specific commercial tenancy contract govern the relationship. Province-Specific Law Regarding Leasehold Estates: • British Columbia: Rights, remedies and obligations of landlord and tenant with re- spect to residential premises are largely codified (Residential Tenancy Act, S.B.C. 2002, c. 78 and Regulations). Commercial tenancies are dealt with in less detail by the Com- mercial Tenancy Act, R.S.B.C. 1996, c.57. • Ontario: The relationship of landlord and tenant with respect to residential tenancies is governed by the Residential Tenancies Act, 2006, S.O. 2006, c. 17. Commercial tenan- cies are dealt with in the Commercial Tenancies Act, R.S.O. 1990, c. L.7. INTERESTS IN LAND LESS THAN ESTATES As a result of the doctrine of privity of contract, it is important to determine whether an agreement has created an interest in land. The doctrine of privity of contract states that only the parties to a con- tract can enforce the rights under it. This doctrine does not apply to contracts which create an interest in land. Therefore, if André grants a right of way over his property to Bernice and then sells his prop- erty to Camille, Camille is bound by André's and Bernice's agreement if she purchased the property with prior notice of the agreement. As a result, interests in land are said to "run with the land". There are two main classifications of interests in land which do not amount to estates, namely easements and restrictive covenants. These interests will have an effect on the rights of the owners to use a property (including a neighbouring property) as well as on the market value of a property. Easements An easement is a privilege acquired by a landowner for the benefit of his or her land over the land of another. The land receiving the benefit is called the dominant tenement and the land over which the right is exercisable is called the servient tenement. Figure 1 illustrates how a typical easement oper- ates. 4.8 Chapter 4 Figure 1: Easement In order to constitute an easement at law there are three basic requirements: 1. There Must Be both a Dominant and a Servient Tenement. Simply put, this means that there must be two parcels of land affected by every easement. The dominant tenement enjoys a right of use over the servient tenement. In Figure 1, lot 3, the dominant tenement, has the right to use the servient tenements, lots 1 and 2, to gain access to the lake. 2. The Easement Must Accommodate the Dominant Tenement. It is the land which must benefit from an easement and not merely the land-owner. If the owner alone obtains the benefit, then the right created is not an interest in land. The right would be a contractual licence, not an easement, and the doctrine of privity of contract would apply. The test employed by the courts to determine whether an easement or a licence has been created is whether or not the right makes the dominant tenement a better and more usable piece of property. 3. The Easement Must Be Capable of Forming the Subject-Matter of a Grant. In other words, the easement must be capable of reasonably exact definition. One must be able to identify its boundaries, and the person granting the easement and the person whose land receives the benefit of the easement must have the necessary capacity to be grantor and grantee. Examples of easements include rights of way, rights to light and rights of support. With respect to the right of support, every parcel of land has a natural legal right to receive both vertical and lateral support from the adjacent soil. So if a neighbour excavates up to the boundary line and, as a result, the adjoining lot subsides or collapses, the neighbour will be liable in damages for depriving the adjoining owner of the right to support. However, buildings on the land do not have the natural right of support at law given to the land itself, so it is necessary to grant an easement of support in order to protect them (although the recent law of negligence may now afford some protec- tion here). Creation of an Easement Easements may be granted for any length of time. They may be created by statute, by an express document, by implication of law or by prescription (commonly called "squatter's rights", prescription does not exist in British Columbia, although it does in other jurisdictions). A statutory easement does Property Law and the Law of Contract 4.9 not have to fulfil the common law requirements listed above. Section 218 of the British Columbia Land Title Act allows the Crown, a municipality, or other designated persons to create easements without dominant tenements. These are often called "statutory rights of way". BC Hydro and Power Authority uses this power to acquire rights of way for power poles even though they do not own the land to be benefitted by the easement. An implied easement will result if the intention of the parties granting the easement has not been sufficiently explicit. For example, an implied easement would arise in the case where one of two commonly supported houses has been sold and no mention was made of any easement of support. Also, an easement will be implied in order to better enjoy a right granted expressly. This would be the case if the use of a well was granted but no mention was made of the access to and from it. Mortgages Over an Easement A mortgage may be granted over an easement, in which case the mortgage may appear on any title against which the easement is also registered. The registration of a mortgage over an easement does not generally restrict the owner of the property from dealing with the property in the usual manner. Mortgages over easements are often obtained by utility companies. Release of an Easement An easement may be released by an express agreement between the present owners of the dominant and servient tenements. It can also be released by implication if the dominant owner shows an inten- tion to release it, for example, by abandonment. Restrictive Covenants A restrictive covenant imposes a restriction on the use of one person's land for the benefit of another piece of land. The restriction must be a negative obligation. It does not matter whether the wording of the covenant is positive, if it is negative in effect. The person who imposes the restriction is called the covenantee and the person who agrees to be bound by the restriction is called the covenantor. There are three essential requirements which must be established before the courts will find a restrictive covenant: 1. It must be negative in nature, for example, by imposing a restriction on building upon or using of property in a particular manner; 2. The covenantee must retain property which will itself be protected, or, if the restrictive covenant benefits the land (and not the covenantee personally), then the covenant will run with the land and subsequent owners will be able to enforce the restrictive covenant; 3. The burden of the restriction must have been intended by the parties to bind the land. It cannot be merely a personal promise. Release of a Restrictive Covenant Like an easement, a restrictive covenant may be released by an express agreement between the present owners. It will be presumed to have been released if there has been open enjoyment of the land for many years inconsistent with it, or if the persons entitled to the benefit have agreed to or ignored a changed use of the property. Finally, it ceases to be enforceable if the character of the neighbourhood has changed so as to make enforcement useless. 4.10 Chapter 4 Building Schemes A building scheme is a special example of a group of restrictive covenants attaching to two or more lots within a particular development plan. Often, this type of scheme is used by a developer who is selling lots in a residential subdivision and wants to maintain uniformity in the use of the lots to pro- tect their value. In order for the arrangement to constitute a building scheme, the following require- ments must be met: 1. the parties must receive their title from the same vendor (these initial purchasers may, of course, sell to others without affecting the building scheme); 2. the vendor must have laid out and sold the property subject to restrictions which apply equally to all the individual lots and which are consistent with some general scheme of development; 3. the vendor must have intended that the benefit of the restrictions should bind each individual lot; and 4. the purchasers must have purchased their individual lots on the understanding that the restrictions were for the benefit of all the other lots. Like a restrictive covenant, a building scheme will be registered against the titles of the lots. Licences A licence is not an interest in land. It is a contractual right or privilege to do something. In the con- text of real property, a licence may entitle a person to enter upon and use the grantor's land in a cer- tain manner or for a certain purpose; for example, an oral agreement to dump topsoil on the land for a short period of time. A licence does not create an interest in land and therefore does not bind subsequent purchasers. However, a licence may be joined with an interest in land (an easement, for example), in which case it would run with the land. Other Interests in Land Capable of Being Mortgaged Mortgage financing can be obtained for a variety of interests in land. Such interests in land include strata property, common property owned by a strata corporation (ordinarily only mortgaged by the developer of the strata), cooperative interests in land, and shared interests in land. Each of these interests has its own unique problems with respect to the granting of a mortgage, but each interest is capable of being the subject of a mortgage. THE EXTENT OF "OWNERSHIP" IN LAND As explained above, "ownership" in land means ownership of one of the estates or interests in land that have been described. A fee simple estate is the largest interest a person can have in land. What does "ownership" of this estate involve? There are two aspects to this question. First, what rights does a fee simple owner have over the ground under his or her property or the air above it? Second, since land includes what is affixed to it, how does an object become "affixed" to land? Airspace, Subsurface, and Water Rights At common law, a landowner's rights were said to extend down to the centre of the earth and up to the heavens. The latter part of this concept has been modified so that a landowner now owns or has rights in the airspace above his or her property only to the extent that the landowner can make effec- tive use of it. Even this concept is altered by statutes; for example, the federal Aviation Act allows an aircraft to pass through the airspace without liability for lawsuits if no physical damage results. Property Law and the Law of Contract 4.11 The subsurface rights of a landowner have also been reduced, mainly by the provincial govern- ments which have reserved most of the precious minerals, metals and petroleum products for their own use. As well as reserving rights to various minerals, the Crown also reserves other rights for itself. For example, the Crown has kept wide powers to make further "reservations" etc., under section 27 of BC's Land Act. In addition, because the Crown is the absolute owner of property, it may expropriate property for a wide range of purposes. Usually, any expropriation is accompanied by compensation to persons whose property is taken, but this is not always true. Further limitations can be imposed by municipalities. For example, municipalities have the right to require a person subdividing land to provide for and construct highways. This power is not, of course, as wide as that retained by the Crown because the power of the municipality only arises where there is a subdivision of land. Keep in mind that there is a value attached to airspace and sub-surface rights. Airspace can be worth millions of dollars. For example, a developer erecting a downtown office tower can increase the floor space ratio of the tower by acquiring the rights to the airspace of adjacent properties and thereby circumventing restrictive zoning bylaws. Another way airspace is used is by physically projecting a development into the airspace above an adjacent building. In British Columbia, all water except ground water is the property of the provincial government. To be entitled to use surface water, a landowner must be licensed under the Water Act, which accords priority of rights to the earliest applicants. Licenses are not unconditional or indefinite, and certain conditions are placed on them. Fixtures and Chattels When determining the property rights of a buyer or seller in a sale of land, or to determine the extent of the real property that might provide security for a mortgage loan, the courts distinguish between fixtures and chattels. Items that are fixtures are considered to be part of the real property and will belong to the buyer after completion, while chattels remain the personal property of the seller. To decide whether an item is a fixture or a chattel, the courts have adopted a general two-part test. The first aspect of the test has to do with the degree of affixation. The case of Stack v. Eaton established that articles attached to the land merely by their own weight will, in the first instance, be considered chattels unless circumstances show that they were intended to be part of the land. On the other hand, articles which are affixed, even slightly, will be considered to be fixtures unless circumstances show that they were intended to be chattels. The second aspect of the test concerns the purpose of affixation. Where an object is affixed for the better use or enjoyment of the object as an object, it will be considered a chattel. Where the object is affixed in order to enhance the land to which it is affixed, the object will probably be considered to be a fixture. This test is an objective test, and does not depend on what the person affixing the object says was the purpose. For example, a painting hung on the wall of a house would be considered a chattel while a lighting fixture hung from the ceiling of a house would be considered a fixture. It is clear that these tests are highly subjective in their application and the cases on the distinction between chattels and fixtures are often difficult to reconcile. CO-OWNERSHIP OF LAND Where land is owned by more than one person, such ownership is generally either by joint tenancy or by tenancy in common. Joint Tenancy In a joint tenancy, each co-owner owns an undivided interest in the whole of the property. The essen- tial feature of this type of ownership is the right of survivorship. That is, when one joint tenant dies, the entire tenancy remains with the surviving joint tenants. Therefore, joint tenants cannot leave their interests to anyone in their wills. At common law, four "unities" or principles had to exist and be main- tained in order to create a joint tenancy and to have it continue. 4.12 Chapter 4 Unity of Time This means that all joint tenants must receive their interests at the same time. Unity of Title This means that all joint tenants must obtain their interest from the same document, for example, a will or a deed. Unity of Interest This means that all joint tenants must have the same interest in land. The extent, nature and duration must be identical. For example, one cannot have a fee simple and another a life estate. Unity of Possession This means that each interest is an undivided interest in the whole of the property. No one holds any part separately to the exclusion of the others. Because the right of survivorship could create unfairness, the law will only recognize a joint tenancy if it has been expressly created. If a document transfers property to two co-owners without saying how they will hold the property, the law will presume they are tenants in common, to which the doctrine of survivorship does not apply. Termination of a Joint Tenancy A joint tenancy may be terminated in one of three ways: 1. severance of the joint tenancy by operation of law; 2. partition by mutual agreement of the joint tenants; 3. partition by a court order under a provincial statute such as British Columbia's Partition of Property Act, R.S.B.C. 1996, c. 347. The three ways whereby a joint tenancy may be terminated will be discussed briefly below. Operation of Law A joint tenancy depends on the continuance of the three unities of title, interest and possession. If any of these unities are destroyed, the joint tenancy is severed and a tenancy in common is created. The unity of time of vesting only applies to the original creation of the joint tenancy and cannot, therefore, be affected by any subsequent act. Destruction of the unity of title is the most obvious and common way in which a joint tenancy will be severed. In particular, the sale, mortgage or attachment of one joint tenant's share will destroy the unity of title and create a tenancy in common so far as that per- son's share is concerned. For example, if Xavier, Yasmin and Zeb are joint tenants and Xavier sells his interest, Yasmin and Zeb remain, as between themselves, joint tenants of a two-thirds interest in the property but they become tenants in common with the new co-owner of Xavier's one-third inter- est. Many people do not realize that a joint tenant, like a tenant in common, may freely sell, mort- gage, lease, etc., his or her own interest, without requiring the consent or knowledge of the remaining co-owners. If the joint tenant does so, the joint tenancy may be severed, even though the other joint tenant is unaware of his or her action. Finally, it should also be noted that a severance may be effected by one joint tenant executing and registering a conveyance to him or herself. Partition by Agreement Simply stated, joint tenants may agree to partition the property and the agreement is enforceable by either party or by a person deriving title from them. It is important to realize that partition does not create a tenancy in common. Upon partition, each co-owner takes his or her part solely, beneficially, Property Law and the Law of Contract 4.13 and free from any rights of the other co-owners. In contrast, it is also important to understand that joint-tenants may agree to create a tenancy in common by contract. This, however, is not a partition by agreement, but a severance by destruction of the unity of title. A tenant in common maintains certain obligations to the other co-owners. Partition or Sale by Court Order In British Columbia, the Partition of Property Act provides that joint tenants may be compelled to make partition or sale of the land upon application of a joint tenant. The importance of this statutory procedure is that the partition can be initiated unilaterally. Mutual agreement is not needed. Tenancy in Common A tenancy in common has only one unity, that of possession. Therefore, tenants in common may have different shares in their property; for example, two may have a quarter share each and one may have a half share. A tenancy in common may be terminated: • by an agreement between the parties to sell one tenant's interest to the other; or • by an agreement between the parties to sell the whole interest to a third party; or • by a court order under a provincial statute such as British Columbia's Partition of Property Act. Note that a tenancy in common, unlike a joint tenancy is not terminated merely because one party chooses to sell his or her own interest. The purchaser will simply become the new tenant in common. Because there is no right of survivorship in a tenancy in common, a tenant in common may leave his or her interest by will to whomever he or she wishes. While it is uncommon, it is possible for one or more tenants in common to obtain a mortgage that is a charge only upon the registered share of the subject tenant(s) in common and not the other tenant(s) in common. LAND REGISTRATION SYSTEMS Historically, title to land was governed by the common law. At common law, title to land or "owner- ship" of land was proven by producing all the relevant deeds and other documents affecting a particu- lar piece of real property over the previous years. This was called "establishing the chain of title". This system was awkward, inconvenient and expensive because a large number of documents had to be kept and produced for review whenever there was a transaction concerning the land. Each new pur- chaser had to ensure that the chain of title was valid and could not be struck down by some invalidity in a previous transaction. Under this system, mistake or fraud could arise. Also, documents could be lost, destroyed or mislaid. Many of the complexities of English land law are attributable to the failure to institute a com- prehensive registry system, and even now there is no overall land registration system in the United Kingdom. In Canada, however, a variety of land registration systems have developed. To varying degrees, these systems have simplified the problems of determining rights of ownership in, and encumbrances upon, real property. The oldest system is the registry system, which is used extensively in eastern Canada. The most sophisticated and progressive system is the Torrens system (named after its Australian inventor), which is commonly known as the land title system. It is used throughout western Canada, and is increasingly being used in some eastern provinces such as Ontario. An inter- mediate system, combining some of the features of both the registry and land title systems, is the title certification system. 4.14 Chapter 4 Registry System In a number of common law jurisdictions, a system of deeds registration was introduced in an attempt to solve the problems in the old system. Under the deeds registration system, deeds had to be regis- tered in a local record office. Persons claiming an interest in any of that land may register virtually any kind of document evidencing their claim. The system is generally supported by legislation providing that a registered title prevails over an unregistered title, thus making registration virtually obligatory. The system consequently provides some degree of title protection to registered land owners. How- ever, to establish or confirm title, one must generally engage a lawyer to catalogue and analyze the various documents registered against the parcel of land in question in order to ascertain who is the true owner and what encumbrances affect title. A proper "chain" of title is usually required by the sup- porting legislation to be established over a minimum number of years, often at least 40. It is important to remember that this is just a record-keeping system, with the validity of title to land still dependent upon whether the deeds themselves were valid. Registration had no effect upon the validity of the deeds. At common law, a void deed remained void even though it was registered. Void Deeds Technically, a deed is any document under seal, but the popular meaning of a deed is a conveyance of real estate. A void deed is one which, although it looks valid, has no legal effect. The fact that it is void means that it is not capable of transferring any title in the land from the vendor to the purchaser so the transaction is therefore a complete nullity. Once a "break" in the chain of title has occurred, all sub- sequent transfers are of no effect, even though the transactions have been made in good faith and for value. This is referred to as the doctrine of the void deed and expresses a fundamental tenet of English land law: nemo dat quod non habet, or, one cannot give what one does not have. Example Mike, the owner of Blackacre, leaves the country for a long holiday. Dave forges a deed which transfers Blackacre from Mike to Dave and files it in the local record office. Dave then sells Blackacre to Scott, who honestly believes Dave is the true owner. Over the next 5 years, Black- acre is sold 3 times, to Leslie, Adele and then Deborah. Each new purchaser files the deeds in the local record office. Mike returns. Because the deed from Mike to Dave was void, so are the deeds from Dave to Scott, Scott to Leslie, etc. Mike can recover Blackacre and Deborah must sue Adele, who must sue Leslie, etc. Three of the most common types of void deeds are: • the forged deed; • the deed given in exchange for an illegal act or thing; and • the deed signed in circumstances where the party can plead non est factum (that is not my deed). The first two categories are clear. So long as fraud, forgery or illegality is proven, the transaction will be void. A plea of non est factum is available where a deed is signed by a person who is unaware of what was signed. However, the signer must be deceived about the very nature of what he or she is signing. For example, a blind person who is told that a document being signed is a lease, when in fact the document being signed is a deed, could plead non est factum. Under the common law doctrine of the void deed, a person whose title was "transferred" by a void deed could recover title upon proving in court that he or she was, in fact, the rightful owner. As in the example, the rightful owner could recover his or her land regardless of how many times it had subsequently changed hands. The current "owner" would lose the title and would have no remedy other than to sue the person from whom he or she had bought the land, and so on back to the forger or to the person who had perpetrated the fraud. Unfortunately, forgers are usually impossible to locate after the fraud is complete. Property Law and the Law of Contract 4.15 Difficulties with the Registry System The above rule created much uncertainty in land holding. A purchaser of land could not be sure that title was secure until he or she had held the land for 20 years (the limitation period for claims in respect of void deeds). Although recording the documents in a central office helped to reduce the pos- sibility of misplacing deeds, it did nothing to prevent the making of a void deed. The doctrine of the void deed was a harsh rule because, to all appearances, void documents look like proper instruments to pass title and could be registered as such. The face of the deed will not show that the signature was forged or was obtained under threats or duress or in return for some illegal act. Therefore, the system of deed registration was inadequate to protect innocent purchasers from later losing title to the right- ful owner of the land. In the jurisdictions in Canada where the common law deed registration still exists, purchasers will often acquire title insurance to protect their investments. A related problem with the registry system arises from the lack of control over the form and substance of the documents which may be registered. A potential purchaser may incur relatively high legal costs in retaining a lawyer to examine the documents and provide a legal opinion as to the validity of title. That often leads to undue duplication of legal services, especially in modern subdivi- sions where title opinions are frequently given by lawyers for each of the various lot purchasers. Land Title System As with the registry system, the land title (Torrens) system establishes obligatory land registration offices for each land district. However, only certain types of interests in land are recognized and reg- istrable. Types of interests which might lead to confusion as to ownership, such as notices of trust, frequently cannot be registered. Registration of permitted interests must be in accordance with speci- fied and carefully regulated forms. Once an interest in land is accepted by the registration office and is recorded on the land register, that interest is generally presumed by statute to be true and correct. A person shown on the register as the owner of a parcel of land, a mortgage, or a leasehold interest, is usually deemed by statute to be the owner of the stated interest unless registration has been affected by a few specified exceptions such as fraud or forgery. No lawyers' opinions are required to establish that Wilma in fact owns Blackacre, if the register shows Wilma as its owner. However, see the different treatment of title and charges in BC, below. In order to obtain the security of the registry, one must deal with the registered fee simple owner and not with a person who only claims to be the owner. Once one deals with the registered owner, it does not matter if that registered owner became registered through a forgery. Example Earl is the registered owner in fee simple of Blackacre. Charlie forges a deed, transferring the fee simple interest in Blackacre from Earl to himself. Charlie registers, thereby becoming the registered owner of Blackacre (through forgery). Charlie then sells Blackacre to Harvey, who knows nothing of the fraud. Harvey registers. While the land titles system would not have protected Charlie, because he obtained title through fraud, it does protect Harvey, who gets to keep Blackacre. In some provinces where a land title system is not universal, such as Ontario, persons may, upon pay- ment of a fee, bring properties into the system. This practice is frequently followed for major devel- opment projects, where assurance of title for mortgage purposes is required. In many states of the United States where the land title systems are not in effect, the function of providing title protection is effected by title insurance companies. Specific British Columbia Law Regarding Land Titles: British Columbia has a land title system. Fees are charged on virtually all transfers of interests in land. These fees are established by the Property Transfer Tax Act, R.S.B.C. 1996, c. 378. The property transfer tax, first instituted in 1987 as the Property Purchase Tax Act, replaced the registration fees payable under the Land Title Act and is computed as a percentage of the fair market value of the property, or of the interest transferred. Some transactions are exempt from this tax. 4.16 Chapter 4 The effect of registration of title to land is to certify the registered owner as "indefeasibly entitled to an estate in fee simple in the land described in the certificate" subject only to the reservations, restrictions and charges listed in s.23 of the Land Title Act. This so-called "indefeasibility principle" means that, in British Columbia, anyone acquiring in good faith (honestly) for valuable consideration (usually fair market value) a fee simple interest or an estate in land from someone who is registered in the land title office as the fee simple owner, is protected by our land title system. These purchasers can keep their interest or estate even if the registered owner has acquired title by fraud or forgery. However, people acquiring an interest in land by dishonest means are not protected by the inde- feasibility principle. So long as the dishonest "owners" have not sold that interest in land to a good faith purchaser, the true or rightful owner can recover the title from someone who became registered through fraud. This rule is contained in s. 23 of the Land Title Act which contains ten exceptions to the rule or principle of indefeasibility. These exceptions are outlined in Figure 2. Figure 2: Exceptions to the Indefeasibility Principle There are 10 exceptions to the indefeasibility principle: 1. reservations contained in the original or other Crown grants 2. Federal or Provincial taxes, rates or assessments, etc. 3. municipal charges, rates or assessments, etc. 4. leases for terms of three years or less where the tenant is in occupation 5. highways or public right-of-ways, watercourses, public easements, etc. 6. a right of expropriation or to an escheat 7. a caution, caveat, charge, builder's lien, judgment, certificate of pending litigation, etc. noted or endorsed on the certificate of title 8. the right of a person to show that the land is, by wrong description of boundaries, included in the certificate of title 9. fraud, including forgery, by the registered owner 10. a restrictive condition imposed on the land by the Forest Act The principle set out above which protects the fee simple interest acquired by an innocent party rely- ing on our land title system does not protect an innocent party of an interest in land that is less than a fee simple, where that interest was acquired from a fraudulent registered owner. In the case Gill v. Bucholtz (2009), the BC Court of Appeal confirmed that a true or rightful owner of a fee simple inter- est in land may reclaim their title to the land from a fraudulent registered owner, free of an innocent charge holder's interest where that charge holder's interest was gained from the fraudulent registered owner. Accordingly, an innocent party of any interest less than a fee simple interest in land, may not rely on our land title system as being conclusive proof of ownership if the registered owner acquired their interest by fraudulent means. The registered holder of a charge is "deemed to be entitled to the estate, interest or claim created or evidenced by the instrument in respect of which the charge is registered, subject only to the excep- tions, registered charges and endorsements that appear on or are deemed to be incorporated in the register". Section 26 of the Land Title Act then continues, "Registration of a charge does not consti- 1 tute a determination by the registrar that the instrument in respect of which the charge is registered creates or evidences an estate or interest in the land or that the charge is enforceable." This means that although a registered title is indefeasible, a mortgage is not, with the result that a purchaser of a mortgage must check with the mortgagor (borrower) to be sure the mortgage is valid. Except as against the party making it, an instrument purporting to transfer, charge, deal with or affect land is not "operative to pass an estate or interest, either at law or in equity" unless the instru- ment is registered (s. 20 Land Title Act). An exception is made for leases not exceeding three years where the tenant is in possession (s. 20(3)). Note that under s. 20 failure to register does not affect the 1 S.26 of the Land Title Act R.S.B.C. 1996 c.250 Property Law and the Law of Contract 4.17 validity of the document as between the parties themselves, although it is not binding on any third parties. Charges created by corporations affecting land must also be filed with the registrar of companies. The sequence of registration depends upon whether the instrument charges land only (in which case it is filed first with the land title office) or whether it also charges other property (in which case it is first filed with the registrar of companies). British Columbia is divided into seven land title districts: Kamloops, Nelson, New Westminster, Prince George, Prince Rupert, Vancouver and Victoria. Administratively, the districts are distributed amongst three land title offices located in New Westminster, Kamloops and Victoria, with each land title office being administered by a registrar. The three land title offices as well as registration responsibilities were transferred to the Land Title and Survey Authority (LTSA) in January 2005, and the LTSA now has responsibility for managing, operating and maintaining the province's land title system. Specific Ontario Law Regarding Land Titles: Ontario has a registry system governed by the Registry Act, R.S.O., 1990, c. R.20, a land titles system governed by the Land Titles Act, R.S.O. 1990, c. L.5, and a certification of titles system governed by the Certification of Titles Act, R.S.O. 1990, c. C.6. The land titles system is in extensive use in northern Ontario and is partially in effect in southern Ontario. The Land Titles Act applies to such parts of the province as are designated by regulations made under the Land Titles Act. All new subdivisions of land in the designated parts of the province must be registered in the land titles system. New sub- divisions in areas of the province not governed by the land titles system (some counties in southern Ontario) must be certified under the Certification of Titles Act prior to registration. Specific Alberta Law Regarding Land Titles: Freehold title to land in Alberta has long been governed by Torrens type legislation; see the Land Titles Act, R.S.A. 2000, c. L-4. Priorities Generally, priorities are determined by order of registration. However, where there is a shortfall in the amount of the security owing to several creditors, the method of settlement of these priorities becomes of fundamental importance. For example, a property subject to two mortgages and four liens in an aggregate amount of $150,000 is sold for $100,000 in execution proceedings. How is this sum divided? Is each creditor paid in full, in order of priority, or are they all paid two-thirds of the amount owing? Under the Torrens system as well as most of the other systems, the encumbrancers are paid in full in order of priority until the money runs out. This may be varied by statute in some circumstances. Example Bob executes a mortgage of Blackacre in favour of the Acme Loan Company on June 1, and receives $75,000. On June 10, Bob executes another mortgage of Blackacre in favour of the Easy Money Loan Company for $50,000, and receives $50,000. The Easy Money Loan Company registers its mortgage on June 10 not knowing of the Acme Loan Company's mortgage, but the Acme Loan Company neglects to register its mortgage until June 11. Black- acre is sold for $100,000 under realization proceedings brought by the Acme Loan Company. In that instance, the Easy Money Loan Company receives its full $50,000 principal plus interest and legal costs out of the sale proceeds, and the Acme Loan Company receives the remainder, thus bearing a $25,000 shortfall. Because of its prior registration, the Easy Money Loan Company's mortgage is the first mortgage and the Acme Loan Company's mortgage is the second mortgage, even though the Acme Loan Company's mortgage was executed and implemented prior to the Easy Money Loan Company's mortgage. Priorities may be complicated in some cases. 4.18 Chapter 4 Example Assume the same facts as above, except that on June 10 the Easy Money Loan Company advances only $35,000 of the $50,000 specified in the mortgage, with the remaining $15,000 being advanced on June 15 (i.e., after the registration and advance of Acme Loan Company's $75,000 mortgage). In this instance, the Easy Money Loan Company only has priority to the extent of $35,000. The Acme Loan Company ranks second for $75,000, and the Easy Money Loan Company ranks third for the remaining $15,000 advanced to it. Thus the Acme Loan Company suffers a $10,000 shortfall and the Easy Money Loan Company a $15,000 shortfall. Similarly, in a building mortgage where funds are advanced based upon degrees of completion of a project, complications often arise. For example, the question of priorities can arise between builders' lien claimants and mortgage lenders who registered prior to the lien claims but later advanced mort- gage funds. Answers to these and other complicated questions of priority are often found in the legis- lation governing land registration and liens, or in the decisions of the courts. Specific British Columbia Law Regarding Registration Priority: Section 28 of the Property Law Act, R.S.B.C. 1996, c. 377 provides that further advances made under a prior mortgage have priority over subsequent mortgages and judgments where certain criteria are met. Doctrine of Notice The law of equity developed the concept that a person claiming an interest in land would be subject to prior interests in that land if actual notice of those prior interests had been received prior to the time when the person's own interest was created. Actual notice was a question of fact which often had to be determined by a court. If the person claiming the prior interest could demonstrate that he or she had either told or sent written notice of the claim to the subsequent claimant, then actual notice would generally be found to exist. The doctrine was extended to apply to persons who, if they had used rea- sonable prudence, would have been able to discover the existence of prior interests in the land. This doctrine, called constructive notice, was developed in order to discourage persons from deliberately failing to make prudent inquiries into the title to the land with which they proposed to deal. As with actual notice, constructive notice was a question of fact and usually had to be resolved by a court. The doctrines of actual and constructive notice were introduced into Canada despite being inconsistent with the provincial land registration systems. The overriding rationale of a registration system is that third parties need not investigate beyond what appears on the register. Provincial leg- islatures, to varying degrees, have attempted to abolish the doctrines by deeming a registered interest to be actual notice to third parties. However, in some circumstances, a holder of a prior unregistered interest may still be able to defeat a holder of a registered interest. In most provinces, this means an unregistered interest holder would have to prove that the registered interest holder's registration amounted to fraud. Province-Specific Laws Regarding Notice: • British Columbia: Section 29 of the Land Title Act provides that except in the case of fraud, no person is affected by notice (express, implied or constructive) of an unreg- istered interest affecting the land or charge. However, the case of Woodwest Develop- ments Ltd. v. Met Tec Installations Ltd., (1982) 26 R.P.R. 81 (B.C.S.C), held that a title or charge may be subject to an unregistered interest of which the transferee has actual notice prior to the time at which the transferee registers his own interest. In this case, the court held that registration in the face of such knowledge constituted fraud. The fraud in this case consisted of the transferee's knowledge that the lease existed, cou- pled with its failure to secure an executed copy of the lease and its immediate resort to the provisions of the Land Title Act after the purchase. Property Law and the Law of Contract 4.19 • Ontario: The doctrine of constructive and actual notice applies in the registry and certification of titles systems. The doctrine has apparently been abolished in the Land Titles Act (s.81(5)), but whether the courts will narrowly interpret the section remains to be seen (see Falconbridge, On Mortgages, 4th edition, pp. 225-231). • Alberta: Section 195 of the Alberta Land Titles Act declares that no person dealing with the registered owner is affected by notice of any trust or unregistered interest, except in the case of fraud. For an indication of what constitutes fraud see the decision of the Alberta Court of Appeal in Holt, Renfrew and Co. Ltd. et. al. v. Henry Singer Ltd. et. al.,  4 W.W.R. 481. Assurance Fund In all systems of title registration, errors, or the operation of the system itself, may cause loss to an owner of an interest in land. A fund, usually called an assurance fund, operates to reimburse these unfortunate owners. The fund is intended to compensate parties who, as a result of the principle of indefeasibility, have lost an interest in land. In other words, if the Torrens system had not been intro- duced, such persons could have recovered their land. To qualify for compensation, a claimant must prove the following: • that the claimant has lost an estate or interest in lands as a result of the registration of a person other than the claimant as the owner; • that, if the Land Title Act has not been passed, the claimant would have recovered the interest at common law by a court action; and • that the claimant cannot recover that interest or estate (or compensation for it) by a court action. If claimants can satisfy these three conditions, they will be entitled to recover compensation from the fund. An owner cannot recover from the fund if the loss is caused by the owner's own negligence, fail- ure to register the interest, or by some other careless act. The following examples illustrate its general application. Examples Art is the registered owner of Blackacre. Bart forges a transfer into his name and regis- ters. Bart then mortgages Blackacre to Carla for the sum of $50,000.00. Carla registers the mortgage. Result? Art is entitled to Blackacre free and clear of Carla's mortgage. Although Carla dealt with the registered owner of Blackacre, she was not a fee simple purchaser and is therefore not entitled to rely on the principle of indefeasibility. As well, because Carla's security is based on a forged deed, Carla cannot claim against the assurance fund for the money to satisfy the mortgage as she would not have had a claim at common law. Andy is the registered owner of Blackacre. Barney forges a mortgage from Andy into his name and registers it. Barney sells the mortgage to Floyd for value and Floyd registers. Results? Andy is entitled to Blackacre free and clear of the mortgage. The principle of inde- feasibility will not protect Floyd because it does not extend to charges. Floyd does not have a claim against the assurance fund because he would not have had a claim at common law. He did not lose an interest because of the Land Title Act. He never had a valid interest because the mortgage Floyd bought was a void deed. Title Certification System A title certification system has some of the features of both the land titles and land registry systems. Under the governing legislation, it is usually possible to apply to the appropriate land registration office for issuance of a certificate stating that a particular person is the owner of a parcel of real prop- erty. If the statutory procedure is followed, the legislation generally provides that the land registration office may issue the certificate asked for. The certificate, by statute, is valid as against all other compet- 4.20 Chapter 4 ing claims to the land and operates as a new and good "root" of title. However, the land continues to be governed by registry system principles after the date of the certificate. Accordingly, subsequent transactions may occur and documentation may be registered which lead to new title complexities, all of which have to be analyzed by title searching lawyers as under normal registry systems. The system is of some value, however, in subdivisions where the establishment of a valid title in the name of the subdivider avoids duplication of title searches for each lot sale. CORPORATE OWNERSHIP OF REAL ESTATE Joint stock corporations gained popularity in the last half of the nineteenth century as a means of carrying on a business. Adapting these artificial "persons" to real estate concepts, which were based upon ownership by living persons, gave rise to some statutory restrictions on land ownership by corporations. Some provinces required corporations to acquire special land holding licences. These restrictions have been rescinded in recent years, and corporations now hold land in their province of incorporation in the same way as a natural person. Corporations may, however, require special licences to acquire land outside their province of incorporation. Province-Specific Laws Regarding Corporate Ownership: • British Columbia: Section 30 of the Business Corporations Act, S.B.C. 2002, c. 57 pro- vides that a company has the power and the capacity of a natural person to hold land. Under the Business Corporations Act, extra-provincial companies in British Colum- bia no longer require registration in order to acquire or hold any interest in land (al- though they are required to register if they are carrying on business in BC). The Land Title Act, provides that the registrar may require the incorporation number be stated after the name of the corporation in an instrument (s. 150). Furthermore, the Land Title Act, contains rules regarding who may sign on behalf of the corporation and how it must be done. • Ontario: Section 15 of the Business Corporations Act, R.S.O. 1990, c. B.16, provides that, for the purposes of owning land, a corporation has the capacity of a natural person. COMMON ITEMS APPEARING ON TITLE The following are some of the more common items that can be of concern to real estate professionals. Duplicate Certificate of Title In BC up to 1979, the registrar issued a duplicate certificate of title for each certificate of title created. Since 1979, all duplicate titles in the land title offices have been cancelled and are issued only upon a written request from the registered owner. A duplicate certificate of title cannot be issued if the certificate of title is subject to a mortgage or an agreement for sale. If a duplicate certificate of title is issued and removed from the land title office, the registrar will not register a transfer, mortgage or long term lease on that title until the duplicate certificate of title is returned to the office. Documents such as short term leases, easements, certificates of pending litigation and claims of builders' liens will be registered even when the duplicate title is out of the office. Occasionally a duplicate certificate of title is lost or destroyed. It can be difficult, complicated and time consuming to obtain a substitute duplicate certificate of title or deal with the land without the duplicate certificate of title. Property Law and the Law of Contract 4.21 Caveats and Cautions Caveats and cautions are notices of claims against real property generally permitted by statutes gov- erning registration of interests in land. Under most land titles systems, persons claiming an interest or estate in land registered within that system are entitled to register a notice of their claim, called a "caveat" or "caution", setting out details of the interest claimed. Generally, the notice does not itself constitute an encumbrance upon or an interest in the land, but only gives other persons dealing with the land notice of the claim. Some land registration legislation prohibits dealings with the land or estate unless prior notice is given to the person who registered the caveat or caution. Occasionally, the legislation will prohibit dealings until the claim is settled, but more frequently it will provide that subsequent transferees will acquire title subject to the claim. Specific British Columbia Law Regarding Caveats: The Land Title Act (s. 282 et seq.) deals with the filing of caveats. Caveats are not used in BC for reg- istration in the normal course of events. They may be lodged only by leave of the registrar. A caveat lapses after two months unless the caveator has commenced an action in court and has filed a certifi- cate of pending litigation (s.293). It may not be renewed after it has lapsed, except in special circum- stances (s. 291). A caveat may only be filed as follows: 282. (1) A person, in this Act referred to as the "caveator", claiming (a) under an unregistered instrument which is incapable of immediate registration; (b) by operation of law; or (c) otherwise to be entitled to land the title to which is registered under this Act, may by leave of the regis- trar, granted on such terms, if any, he may consider proper, lodge a caveat with the registrar prohibiting registration of a dealing with the land either absolutely or in the manner or to the extent expressed in the caveat. The registration of a caveat may prevent registration of other documents (s. 169(3)), or may require that subsequent registrations be made subject to the caveat or have the consent of the caveator (s. 288). To prevent abuse, s. 294 provides that persons who register wrongfully and without reasonable cause are liable to pay compensation to any person who suffers damage as a result. Specific Ontario Law Regarding Caveats: In the Ontario land titles system, notices of claim against real property are called "cautions" and are permitted and filed pursuant to ss. 128-135 of the Land Titles Act, R.S.O. 1990, c. L.5. Specific Alberta Law Regarding Caveats: In Alberta the Land Titles Act, R.S.A. 2000, c. L-4, at ss.130-135.1, provides for the registration of cave- ats. The effect of such registration is that the Registrar of Land Titles is bound not to accept for regis- tration any instrument relating to the subject matter of the caveat, unless the instrument is expressed to be subject to the claim of the caveator (s.135). Section 135 reads as follows: 135. So long as a caveat remains in force, an instrument registered subsequent to the caveat and purporting to affect the land, mortgage or encumbrance in respect of which the caveat is lodged is subject to the claim of the caveator. Certificate of Pending Litigation A certificate of pending litigation provides notice to anyone searching title that a court action has been commenced concerning the property. The certificate of pending litigation itself does not constitute a charge or security upon the real property, but establishes priority over purchasers and encumbrancers 4.22 Chapter 4 subsequently obtaining an interest in the property, if the claim is ultimately upheld by the court. It is different than a charge it can only be filed after litigation has commenced, and requires a certificate from the court to this effect. Specific British Columbia Law Regarding Certificate of Pending Litigation: A certificate of pending litigation will be registered under s. 215(1)(b) of the Land Title Act in the same manner as a charge. Where the litigation relates to an application for title to any property, the registrar must defer consideration of the application for title until the dispute is disposed of (s. 169(3)). A certificate of pending litigation will normally be cancelled upon application if there has been no step taken in the proceeding for one year (s. 252). The owner, or other person claiming an interest in the subject land, may also apply for cancellation if that person can establish that the certificate of pending litigation will likely cause hardship and inconvenience (s. 256). Pursuant to a s. 256 applica- tion, s. 257 provides that the court may: cancel the certificate of pending litigation; refuse cancellation, but require the person to undertake to pay any damages caused to the owner; or refuse cancellation, but require the person to post security in court. Today, registration of an indefeasible title or charge may proceed despite the certificate of pending litigation. However, this can only occur where the instrument is expressed to be subject to the final outcome of the proceeding or where the applicant elects in writing to register subject to final outcome and authorizes the registrar to register subject to the certificate of pending litigation. As with a caveat, a certificate of pending litigation will hinder the sale of a property. Specific Ontario Law Regarding Certificate of Pending Litigation: A person who has obtained a certificate of pending litigation is entitled by s. 103(2) of the Courts of Justice Act, R.S.O. 1990, c. C43, to have the certificate registered under the Land Titles Act or the Reg- istry Act. Pursuant to s. 103(6) of the Courts of Justice Act, a court may make an order discharging a certifi- cate of pending litigation. After the certificate of pending litigation has been discharged, any person may deal with the land as fully as if the certificate had not been registered (s. 103(7)). Liens A lien is a form of security upon property for unpaid money. A lien holder, if left unpaid, has the right to have the property ultimately sold by court order, with the debt to be paid out of the proceeds. Unlike a mortgagee, the lien holder may not foreclose so as to obtain title to the property on his or her own behalf. Liens may be created on real property by equity or by statute. An equitable lien may arise, for example, upon real property sold from John to Ted where John has not been paid the full purchase price. John would, by the rules of equity, have a "vendor's lien" upon the property for the unpaid purchase money. This equitable lien is separate and distinct from a purchase-money mortgage for the same debt, and in effect gives the holder double security. More frequently, liens arise by statute. Most provinces have passed "builders'" or "mechanics'" lien legislation for the protection of persons who supply materials or labour that improve real property. The statutes give those persons a lien upon the property for the amount of their contribution. Many taxing statutes contain provisions to the effect that unpaid taxes constitute a lien upon the real property of a taxpayer who has failed to pay taxes related to that property. Province-Specific Laws Regarding Liens: • British Columbia: See Builders Lien Act, S.B.C. 1997 c. 45 and Repairers Lien Act, R.S.B.C. 1996, c. 404 (both formerly contained in the Mechanic's Lien Act). The Builders Lien Act provides protection against nonpayment of money to persons who have done work or supplied materials for an improvement upon land. The Act establishes a trust fund in the hands of the head contractor equal to 10% of the value of the work done. A Property Law and the Law of Contract 4.23 lien is stated to be a charge on the retained amount. An action to enforce the lien shall be commenced and a certificate of pending litigation filed in the land title office not later than one year from the date of filing the claim of lien. • Ontario: Ontario builders' lien legislation is the Construction Lien Act, R.S.O. 1990, c. C.30. Until recently the Ontario Corporation's Tax Act, R.S.O. 1990 c. C.40, charged real property retroactively with a lien for unpaid tax by previous corporate owners. These unregistered liens are now registrable, relieving purchasers from obtaining a lien clearance from the corporation tax department for all previous corporate owners. Now, any such liens must be registered against title to the land to be valid. • Alberta: The relevant Alberta legislation is the Builders Lien Act, R.S.A. 2000, c. B-7. Judgments Suppose Garth is successful in a lawsuit against Mary, and obtains a judgment for a sum of money. Garth can register the judgment against Mary's interest in any property. Once registered, the judgment forms a lien and charge on the land pursuant to s. 82 of the Court Order Enforcement Act R.S.B.C. 1996 c. 78. The claim in respect of which the judgment was obtained does not have to involve an inter- est in the land. Purchasers will have to take the property subject to the judgment. This usually forces the judgment debtor to satisfy (pay) the judgment to obtain its release. Alternatively, the judgment creditor may bring an application to have the property sold in order to satisfy the judgment. A judgment can only attach to the judgment debtor's interest in land. If the registered owner has transferred or mortgaged away his or her interest prior to the judgment being registered, then there is no interest against which the judgment can attach. If the owner has transferred or mortgaged away only a partial interest, then the judgment can only attach to the remaining part. Province-Specific Laws Regarding Judgments: • British Columbia: The creation and registration of judgments are dealt with in both the Land Title Act and the Court Order Enforcement Act. • Ontario: Judgements are dealt with in the Land Titles Act, ss. 137-139. SUBDIVISION OF LAND An estate in land is essentially the right to possess and enjoy land for a certain time. At common law and in equity, rights in land are carved up on a time basis, as in the case of life estates, leasehold estates, and even fee simple estates. These divisions are distinct from physical divisions of the land itself. The simplest and most common way of physically dividing land is through the use of a surveyor's description. Before the art of surveying was refined, land descriptions were relatively crude. One may still encounter descriptions in which, for example, one of the dimensions is stated as starting at the intersection of two streets (not taking into account possible street widening) and then, "running easterly 50 feet more or less to the line of a two-storey brick building". If the two-storey brick building is later demolished, the legal description will lose its meaning. Surveying practices have greatly improved in recent years and most land titles and registry offices regulate those descriptions. While physical objects, such as planted iron pipes, are frequently referred to as reference points, the regulations tend to require more precise distances and directions. Original Canadian surveys generally divided land into large parcels. This reflected the essen- tially agricultural nature of early Canadian society. These "lots", representing parts of "concessions", included as many as 200 acres. With increasing urbanization, however, farm lots were "subdivided" into smaller parts to permit housing construction. A lot within a concession might be subdivided into a large number of smaller lots intended for varying sizes of dwelling units. Unfortunately, multiple surveys often resulted in inconsistent boundary descriptions. To avoid this problem, "registered plans 4.24 Chapter 4 of subdivision" were introduced. These plans would be prepared by a single surveyor, and were regulated by the land registration offices. Once the plans were registered, specified parcels of land could be referenced without physical boundary descriptions, e.g., "Lot 20, Registered Plan 400". Plans of subdivision usually laid out access roads, which were by statute generally deemed to be dedicated as public roads upon formal registration of the plan. Subdivisions proliferated with the post World War II population explosion. Severe burdens were placed upon municipalities, which had to provide services such as sewers and roads, as well as amenities such as parks. Consequently, many provinces now restrict the filing and implementation of subdivision plans. Subdividers usually must provide for certain services and amenities before they are entitled to sell lots under a subdivision plan. Similarly, restrictions have been placed upon attempts to divide land without plans of subdivision. Province-Specific Laws Regarding Subdivision: • British Columbia: All subdivisions of land are dealt with by the Land Title Act (in- cluding simple subdivisions and the creation of air space parcels which may be either above or below ground level) except condominiums which are dealt with in the Strata Property Act, S.B.C. 1998, c. 43. There are no deemed easements of support or access for air space parcels. Condominium subdivision creates "strata lots" with the com- mon property being held by the strata corporation resulting from the subdivision. The owners of the strata lots are the members of the strata corporation. • Ontario: The Planning Act, R.S.O. 1990, c. P.13 strictly controls the registration of plans of subdivision and also requires special consent for ad hoc divisions of land by "Com- mittees of Adjustment." • Alberta: The relevant legislation in Alberta is the Land Titles Act. With a few excep- tions, the Registrar of Land Titles is bound not to accept for registration any instru- ment that may have the effect of subdividing a parcel of land unless the subdivision has been approved by the appropriate authority (s. 86). Also, see the prohibition on selling lots until after they have been duly registered in the appropriate land title of- fice: Land Titles Act, s. 94(1). Horizontal and Vertical Land Division Parcels of land have been traditionally described by reference to vertical boundaries only. The common law theory was that a parcel extended from the depths of the earth to the limits of the sky. The common law recognized, however, that there could be horizontal divisions as well. An early case recognized that a person could grant a fee simple estate in the upper floor of a house. What would 2 happen if the house was destroyed was not decided. With the advent of skyscrapers, subway systems and similar creations, horizontal subdivisions of land have become common. For the purpose of horizontal subdivisions, surveyors use "datum" level reference marks calibrated to sea level. For example, it is theoretically possible for Fred to own a fee simple estate in Lot 1, Plan 300, from datum line 320 upwards, and Wilma to own a fee simple estate in the same lot from datum line 320 downwards. Subway ownership and easements are frequently expressed in these terms, with the subway authority then selling or leasing "air rights" above the upper datum line. 2 See Megarry and Wade, The Law of Real Property, Fourth Edition, p. 69. Property Law and the Law of Contract 4.25 CONDOMINIUMS It is obvious from the foregoing that drafting legislation to govern the division of land and buildings into areas that can then be brought into the general land system is a complex task. In addition, legisla- tion must cover the day-to-day management of a group of properties and their owners. Provincial statutes differ in many details, so no attempt will be made here to provide specifics; only an outline of general principles is given. Condominium ownership involves both individual ownership of a "strata lot" (a divided area, set out in a strata plan) and common ownership of the parts of the strata development not included in any individual strata lot (the common property). In an apartment building, the strata lots would be the individual apartments and the common property would include hallways, elevators, laundry room, recreational facilities, and the land surrounding the building. The individual lots cannot be separated from their share of the common property. In addition to residential developments, the condominium form has been used for offices, parking lots, equestrian facilities and marinas. The indi- vidual lots are brought into the registry or Torrens systems by the filing of appropriate plans. Under the Torrens system a certificate of title will be issued for each lot indicating the accompanying share of the common property. A condominium requires an administrative structure. Registration of a strata plan creates a statu- tory corporation consisting of the owners of the strata lots. In BC this "strata corporation" is not subject to the Business Corporations Act. Each strata corporation is governed by a board or council elected by the owners. The council's powers and duties are derived from legislation. Its purpose is to manage the development. In addition, the strata corporation will pass bylaws to control use of the units and establish the rights of the individual owners. There may also be rules and regulations governing day- to-day matters such as the use of the various facilities owned by the corporation. Annual meetings of the owners must be held, with each lot entitled to one vote regardless of joint ownership. Special meetings may be called when necessary. A budget covering the operational expenses of the corporation for the next year must be approved. Other major policy decisions can be made, and directions to the board or council approved. The owners must pay their monthly proportionate share of the strata expenses. The corporation is required to keep proper accounts. A reserve fund must be established to cover major renewals or repairs. Since each lot represents a fee simple interest, it may be mortgaged in the ordinary way. The usual remedies are available to a mortgagee when the mortgagor is in default. Many mortgages will contain a provision giving the mortgagee a right to vote in place of the mortgagor at general meetings. The circumstances under which the right can be exercised will be determined by the legislation, the bylaws, and the terms of the mortgage. Of particular interest to mortgagees is a common provision in condominium statutes giving the corporation a statutory lien on each lot for any arrears in the monthly maintenance payments. This lien may have priority over mortgages registered against that lot. Prospective mortgagees may wish to check the accounts to make sure all accounts are up to date and that the reserve fund has been maintained at a satisfactory level. Province-Specific Law Regarding Condominiums: • British Columbia: the relevant statute is the Strata Property Act, S.B.C. 1998, c. 43. • Ontario: see the Condominium Act, S.O. 1998, c. 19. • Alberta: see the Condominium Property Act, R.S.A. 2000, c. C-22. This completes our review of the statutes and common law related to real property issues. We now turn our attention to the law of contract and or business law in general. With this foundation in place, readers will be well-prepared for the topic of mortgage law, presented in Chapter 5. 4.26 Chapter 4 THE LAW OF CONTRACT The term "contract" means a promise or promises, made by one person to another, which the courts will enforce. A contract can contain any number of promises, or "terms", to be performed by either party. However, it can also be a very simple promise. For example: "I, Brown, promise to pay Jones the sum of $100.00 for his 1963 automobile", signed "John Brown" and "Jim Jones". The person who makes the promise is called the "promissor" and the person who can enforce that promise is called the "promissee". If the contract contains several mutual promises, each party will be both a "promissor" and a "promissee". A contract has seven essentials. They are (i) offer, (ii) accep- tance, (iii) consideration, (iv) legal intention, (v) capacity, (vi) legal object, and (vii) genuine consent. If any one of these requisites is lacking, a contract will not result. The form of contract may be oral, an exchange of letters or telegrams, a formal, lengthy written document, or any other exchange of communication. In each case, however, in order for the agreement to be enforceable, the essential elements of a binding contract must be present. As long as they are, the parties have enforceable rights and obligations under that contract. Before we discuss the seven essentials necessary for the creation of a valid, enforceable contract, we should look at the different types of ineffectual contracts. VOID, ILLEGAL, VOIDABLE AND UNENFORCEABLE CONTRACTS Depending upon which essential element is missing, the effect on the contract will vary. Contracts can be ineffective in four different ways: they can be void, illegal, voidable or unenforceable. It is impor- tant to understand what these different forms of deficiency mean in practical terms. Void. A void contract is one which has never existed at all. Even if the parties want it to exist and to have effect, it cannot. The parties are in the same position as if they had never attempted to contract. Money paid by one party to the other will be repayable and no rights can be acquired under it. For example, where parties seek to make a contract in circumstances where there is a mutual or common mistake (as discussed later in this chapter) the resulting contract will be void. Illegal. An illegal contract is one which offends against public policy or against a particular statute (e.g., a contract for murder or a betting contract). Illegal contracts are also void, but the results of a finding of illegality might vary. In some cases, a person who has paid money under an illegal contract will not be able to recover the money, even though the contract is void. In other cases the effect of the finding of illegality will not be so severe. Legality of purpose is one of the essentials for creating a contract discussed below. Voidable. A voidable contract is one which one of the parties has the option to rescind (cancel). Until the contract is rescinded, it is valid and binding on the parties. An example of a voidable contract would be a contract for the purchase of a car by an infant. Such a contract is voidable by the infant, but it is binding upon the other party. If it is rescinded by the infant, neither party will have any further obligations under the contract. The right to rescind may be limited where the other party has acted in such a way that it becomes inequitable to allow the contract to be cancelled. Unenforceable. An unenforceable contract is one which has the essentials of a valid contract but it cannot be sued upon for some procedural reason; for example, s. 59 of British Columbia's Law and Equity Act requires most contracts affecting land to be in writing in order to be enforceable in court, therefore oral contracts respecting land will not be enforceable in many instances. Property Law and the Law of Contract 4.27 OFFER An offer is a promise made by one party to another. The person who makes the offer is called the offeror, and the person to whom it is made is the offeree. At common law, if the offer contains a prom- ise, it can be expressed in any form: in writing, orally, or even by conduct. It is important that an offer be made in clear and unambiguous terms. If a dispute arises, the court must find that a reasonable person would feel there is only one reasonable interpretation which can be given to the "offer". Standing Offer. Normally, an offer is made to one specific person or group of persons and only that person or group can accept it. The exception to this principle is in the case of "standing" offers. These can be made to the public at large and can be accepted by anyone. This first person to meet the requirements of the offer and communicate this to the offeror will be the one entitled to enforce the contract; no one else can accept it unless more than one acceptance was contemplated in the offer. Invitation to Treat. It is important to distinguish an offer from an "invitation to treat" which is something less than a legal offer. An offer, once accepted, creates a contract and can be enforced in the courts. The courts draw a line between promises which are meant to be binding if accepted and statements which are intended only as a form of invitation to the public to submit their own offers. In most cases, newspaper advertisements and store window displays are invitations to treat. Release or Expiry of an Offer. An offer is released or expires when any one of the following occurs: • a time limit is specified in the offer and the offer is not accepted within the limit; • no time limit is specified in the offer but a reasonable time (depending on the circum- stances) has passed; • the person who made the offer communicates revocation before acceptance; • either party becomes insane or dies before the offer is accepted; • a counter-offer is made; • the offer is rejected. Assuming that a definite time is set out in the offer, must the offer be kept open for the specified period? The answer is that the offer can be revoked without waiting for the time limit to run out, as long as the offer has not yet been accepted. However, revocation must be communicated to the offeree. (Byrne & Co. v. Leon Van Tienhoven & Co.). Option Agreement. It is possible to ensure that an offer will be kept open for the stipulated time period by using a type of contract known as an option agreement. Separate consideration is given to keep the offer open. In effect, a separate contract must be formed. "Consideration" is discussed later in the chapter, however, to understand the principle, think of consideration as a payment of money. Counter-Offer. A counter-offer is simply an offer from the offeree back to the offeror. When a change is made to the offer by the offeree, it forms a counter-offer. For example, where a purchaser offered $80,000 and the vendor insists on $85,000, this insistence is a counter-offer from the vendor to the purchaser. Legally, the counter-offer terminates the original offer. In effect, the counter-offer becomes the offer. If the counter-offer is not accepted, the offeree cannot accept the first offer because it has already terminated. A counter-offer is different from an inquiry or a request for information. Such an inquiry or request does not terminate the offer. However, it is sometimes difficult to distin- guish these concepts. ACCEPTANCE The acceptance, like the offer, must be given in clear terms. It must be a positive act. For example, an offer cannot state "If I don't hear from you, I'll assume you've accepted." Doing nothing will not be considered legal acceptance. What form is required for acceptance: oral, written, by conduct? In each case the court must consider the intention of the parties at the time the offer was made. In making this determination, the nature of the offer is important, although not conclusive. If an offer is sent by mail, the court will 4.28 Chapter 4 probably decide that acceptance by mail is what the parties intended. An offer can state how the acceptance must be made, and written offers usually explicitly state the method for acceptance. As a general principle, the offeree should accept by the method the offer requests, or if the offer says nothing about acceptance, accept by the same method by which the offer itself was made. When Acceptance is Communicated. An acceptance has no effect until it is communicated to the offeror. Contracts are categorized in two types: those which can be accepted by instantaneous means (telephone and fax), and those where the parties expect the offer to be accepted by non-instantaneous means (postal and telegraph services). Where acceptance of an offer is intended to be by instantaneous means, the acceptance will not be complete until it has been actually received by the offeror. If, on the other hand, acceptance of an offer is intended to be by non-instantaneous means, such as by mail, then the acceptance is effective when it is put in the mailbox, not when actually received. There is a reason for this "postal acceptance rule". The law places responsibility on the offeror to specify how the offer is to be accepted. If the offeror chooses a method like the mail, he or she must assume the risks involved in that type of service. Improper Communication of Acceptance. The consequences of failing to properly communicate acceptance fall into two categories. The first situation occurs where the intention of the parties is that acceptance should be by instantaneous means and the offeree chooses to accept by a non-instanta- neous method. Acceptance must be actually communicated to be effective. The second situation occurs where the offeror specifies non-instantaneous acceptance, and the offeree chooses an instantaneous method. In this case, the offeror can probably refuse the acceptance because it was not what the offer asked for. By ignoring instructions in the offer, the offeree is risking loss of the contract. It must be noted that the rules regarding communication of an acceptance are not the same as the rule regarding revocation of an offer. There is no equivalent "postal acceptance rule" for revocation. Revocation must always be actually communicated to be effective. CONSIDERATION "Consideration" means "some right, benefit or profit accruing to the promissor or some forbearance, detriment, loss or responsibility suffered by the promissee". In other words, the party trying to enforce the contract must have "paid" something in return for the promise. This consideration must be of some value in the eyes of the court, but it does not have to be money. The exchange of mutual promises will provide consideration for the formation of a contract. The courts will not review the adequacy of the consideration (i.e., whether the price was too high or too low) unless fraud, undue influence, duress or misrepresentation exists. A one dollar consider- ation is just as effective as a one hundred thousand dollar consideration. What is known as "past consideration" is not legally effective. In past consideration, the "payment" given by the promisee has already been made when the promissor offers to pay for it. For example, promising to pay another after they have done a favour for you is giving past consideration and will not form a contract which can be enforced. Seal. A contract made without consideration can still be binding if it is made under seal. Histori- cally, the use of a seal was very important, as it contained the family name that would be diligently honoured. We no longer use family seals in this way. However, red "legal seals" can be purchased at almost any stationery store. If they are affixed to the contract document at the time of the signing, the contract will be binding even though no consideration has been given. Two points should be remembered. First, the parties must be aware of the legal effects of a seal to be bound by the contract. Second, a corporate seal, which is used by a company when signing a document, will not fulfill the requirement for consideration. Quantum Meruit. Quantum meruit is a Latin phrase which means "as much as is deserved". At law, where one person requests the contractual services of another, even though there is no mention of a specific amount, the law will imply a promise to pay a reasonable amount. The principle of quantum meruit will be applied by the courts in each of the following circumstances: Property Law and the Law of Contract 4.29 • where there was no amount specified in the contract for performance of contractual services; • a breach of the contract has occurred and the "innocent" party has performed part, but not all of its obligations under the contract and wants to be paid for the partial performance; • where the contract is void and there has been work performed or services rendered on the assumption that the contract was valid; • where the original contract has been replaced by a new and different contract. Such a situation may arise when one party is in breach of a contract and the party not in default accepts partial or substituted performance in place of the original contractual obligations. LEGAL INTENTION A person must have intended to create legal intentions in order to be bound by a contract. The law presumes that there is a serious intention to be bound in the case of an agreement between strangers or in a commercial contract. On the other hand, if the contract is between family members or very close friends, the law presumes that there is no intention to be bound. These presumptions can be reversed if evidence exists to show otherwise. The courts will evaluate intention objectively by asking, "would a reasonable person think that the parties had a serious intention to be bound?" CAPACITY Incapacity to make a contract can arise in a number of ways. The most common types of incapacity are infancy, insanity, drunkenness, and the lack of capacity of a corporation. Infancy. In each province there is legislation which governs the age at which a person is consid- ered to be an adult in society, capable of looking after his or her own interests. In British Columbia, for example, this age is 19 years. At law, a person younger than age nineteen is considered a minor or infant. Most contracts to which an infant is a party are voidable by the infant. Voidable contracts cannot be enforced against the infant but can always be enforced by the infant. Even where the adult does not know the other party is an infant, the contract is voidable. For example, s. 19(1) of BC's Infants Act, R.S.B.C. 1996, c. 223, provides that a contract entered into by an infant will be unenforceable against the infant (but enforceable by the infant against the adult contracting party) unless: another statute provides that the contract is enforceable, the infant either affirms or performs (completely or partially) the contract after turning 19, or the infant does not repudiate the contract within one year of turning 19. The court has great discretion in terms of remedies where an infant has made a voidable contract. Among other remedies, the court can order restitution of money paid, compensation, and release from further obligation, and is required to consider any and all relevant circumstances in seeking to do equity between the parties. Insanity and Intoxication. Insanity and intoxication can be considered together. The law is similar to the law involving infants' contracts. In each case, the incapacitated person is liable to pay a reason- able price for necessary goods. Contracts for non-necessaries are voidable at his or her option. An incapacitated person seeking to rescind a contract must prove two things: first the person must prove that he or she was incapable of a rational decision at the time the contract was made; second, that the other party was aware of the incapacity at that time. Proving both elements may be difficult. Foreigners and Illiterates. A foreigner or illiterate refers to persons who cannot read or speak English. In this context it includes a blind person. The rule is that if the foreigner or illiterate person knew the general nature of the contract, he or she is bound. Foreigners or illiterates will also be bound by a contract if they neglect to find out the contents of the document before signing. Therefore the illiterate or blind person must ask for the document to be read and explained. However, if the person 4.30 Chapter 4 who read the document to the foreigner or illiterate fraudulently misrepresented what was written, there is no contract. Where the contract was misrepresented, foreigners or illiterates may be able to plead non est factum, which means "that is not my deed" (Dorsch v. Freeholders Oil Co. Ltd.), and no contract will be found. Incorporated Companies. A company cannot make a contract until it is actually formed and legally recognized under the laws of the province. This is very easy to check. All companies must have an official records office. In that office, any person can look over the incorporation documents. In BC, it is generally possible for companies incorporated under the Business Corporations Act to ratify a pre-incorporation contract by act or conduct. Complications might arise due to the fact that some com- panies operating in BC are incorporated under federal or another province's legislation. It is important to be cognizant of this issue, and to seek legal advice if it arises. LEGAL OBJECT Contracts for certain purposes may be considered illegal: for example, a contract relating to operat- ing a bawdy house; a contract seeking to subvert justice; a contract to commit a crime or a tort; and contracts resulting in breaches of statutes, including the Criminal Code, Income Tax Act, Customs Act, and the Competition Act. In each of these examples the "contract" would be completely void and a court would not help a party to recover money or property transferred under the illegal contract if the party knew of the illegality. GENUINE CONSENT Genuine consent means that the parties had a clear understanding of the substance of the contract, and lack of genuine consent can negate the contract. Genuine consent is considered under the catego- ries of misrepresentation, mistake, duress, undue influence and unconscionable transaction. Misrepresentation. A misrepresentation is a false statement of fact, usually made in the nego- tiations before the contract is made. The misrepresentation is sometimes included as a term of the contract itself, but does not need to be. There are three criteria to determine misrepresentation: (1) the statement must be false; (2) it must have induced the other party to enter into the contract; and (3) it must also be one which would have induced a reasonable person to enter into the contract. If any one of these three points is not proven, the misrepresentation will not be sufficient to render the contract voidable. It is important to remember that a misrepresentation is a statement of fact, therefore if a vendor said "I don't think the roof will need replacing for two or three years", it is a statement of opinion, and cannot be an actionable misrepresentation, even if it turns out not to be correct. There is an exception to this rule: an expert's opinion is treated by the courts as a statement of fact. The remedy available to an innocent party depends on whether the misrepresentation was made innocently or fraudulently. An innocent misrepresentation occurs when the false statement is made without knowing it is false. In the case of innocent representation, the innocent party can sue for rescission (the court will cancel the contract) prior to execution of the contract, but cannot sue for damages. A fraudulent misrepresentation occurs when the person making the false statement knows it is false, or says it recklessly and does not care whether it is true or false. In the case of fraudulent mis- representation, the innocent party can sue for rescission at anytime in addition to suing for damages (based on tort law). Mistake. Mistake means a mistake as to an actual term of the contract itself. For a mistake to have legal significance, it must be one of fact and go to the root of the contract. Where a mistake occurs, the contract may be void or voidable. A common mistake is one where both parties to a contract have made the same mistake about a fundamental term of the contract. For example: both a buyer and a seller make a contract believing that what is being sold exists, but in fact, it has been destroyed. This fact is unknown to both parties. Property Law and the Law of Contract 4.31 The existence of a common mistake means the contract is void and neither party will have any legal obligations under it. A mutual mistake occurs when both parties make a fundamental mistake about the contract but each makes a different mistake. A good example is the Raffles v. Wichelhaus case where the parties made a contract for the sale of cotton sold at Bombay, India, to be shipped to England aboard a vessel named "Peerless". By coincidence, that year there were two ships with this same name sailing from Bombay. The seller thought he had contracted to sell cotton on the ship leaving in December and the buyer thought he had contracted to buy cotton on the ship leaving in October. The court held that a reasonable person could not tell which ship was intended. The parties had never reached consensus. Each party had a different intention and the lack of agreement made the contract void. It should be noted that in the case of a mutual mistake, if one interpretation is more reasonable than the other, the court will accept it and will interpret the contract in this way. A unilateral mistake occurs when one party is mistaken about a fundamental term of the contract and the other party is aware of this mistake but does nothing to correct it. A specific type of unilateral mistake is also referred to as "non est factum" which means "it is not my deed". This occurs when a person executes one form of document thinking that the document is something else. It should be stressed that not every mistake will result in a court setting aside a contract. Particu- larly in the case of written documents, the parties are presumed to have read over and accepted the terms of any document they sign. Duress, Undue Influence and Unconscionable Transactions. Duress and undue influence both affect the genuine consent of one of the parties to a contract. Duress occurs where a person is forced to enter into a contract against his or her will as a result of a threat of actual physical force or by a threat of imprisonment of the person, his or her family, or very close associates. Here the party to the contract has really been robbed of the free will to contract. As a result, the courts will find the contract voidable at the person's option. While duress is a well-defined principle in law, undue influence does not yet have established boundaries. It occurs most frequently when one person is in a superior or dominant position in relation to another and uses this position to induce the other to enter a contract which he or she would not have otherwise made (Morley v. Loughlan). This superior position may be the result of a special relationship between the two parties, such as doctor-patient, lawyer-client, or priest-parishioner. If undue influence is found, the contract is voidable at the option of the innocent party. Unconscionable transactions are another area in which equitable relief is available to rescind a contract at the instance of the weaker party. For a court to characterize a contract as unconscionable, the "material ingredients are proof of inequality in the position of the parties arising out of ignorance, need, or distress of the weaker, which left him in the power of the stronger, and proof of substantial unfairness of the bargain obtained by the stronger" (Morrison v. Coast Finance Ltd.). TERMINATION OF A CONTRACT Once a contract has been made, it can be terminated or discharged in many ways. These are: • performance; • agreement to waive performance or substitute another agreement; • non-fulfillment of a condition precedent; • frustration; or • breach of a condition of the contract which is accepted by the injured party. Performance This is the manner intended by the parties at the outset to be the proper way to terminate their con- tract. When the final act of performance occurs, the contract is at an end. 4.32 Chapter 4 Agreement Often the parties will agree to waive full compliance with the terms of the contract. If both parties still have obligations left to perform, the mutual waiver of their obligations will be sufficient consideration to bind them. Otherwise, either new consideration will have to be given to support the variation, or the agreement to waive the balance of the contract will have to be made under seal. Non-Fulfilment of a Condition Precedent A condition precedent is the formal term for what is usually called a "subject" clause in real estate sales. A condition precedent is a condition in a contract which must be satisfied before the contract is to be performed. For example, a residential home may be sold under a contract of purchase and sale which contains a clause allowing for a mortgage to be arranged by the purchaser. If the other issue cannot be resolved, the contract will be terminated. Where a condition is inserted in a contract solely for the benefit of one of the parties, only that party can waive it. Once the term has been waived, the balance of the contract must be performed. Waiver of conditions precedent is covered in provincial statutes such as s.54 of British Columbia's Law and Equity Act, R.S.B.C. 1996, c. 253. That section permits a party to a contract to waive a condition precedent if: • the condition precedent benefits only that party to the contract; AND • the contract can be performed without the condition precedent being fulfilled; AND • the waiver is made before any time stipulated for fulfillment of the condition prec- edent, or within a reasonable time if no time is stipulated. Frustration After a contract has been made, but before it has been performed, it will be frustrated if events outside of the control of the parties destroy the subject matter or change it in such a way that it becomes fun- damentally different from the original contract. For example, frustration would occur where a house was destroyed by fire or lightning after a contract of purchase and sale was entered into (but before completion). Unless the contract says otherwise, such events will relieve the parties of their future obligations under the contract. It is not possible for a party to frustrate a contract through his or her own acts. Frustration is similar to common mistake in that both deal with the destruction (or substantial alteration) of the subject matter of a contract, however frustration deals with the subject matter being destroyed after the contract is made, while common mistake deals with the subject matter being destroyed before the contract is made. Termination by Breach When a contractual promise is not performed, it is called breach of contract. A breach can arise in three ways: • by one party announcing that he or she will not perform although the time for perfor- mance has not yet arrived (anticipatory breach); • by one of the parties making the performance of the contract impossible; and • by failure of a party to perform at the time stipulated for performance. The promissee has the right to recover any damage suffered because of that breach, but a breach does not necessarily mean that the contract is ended. If the breach is of a warranty (a promise which is not fundamental to the contract), the injured party can sue for damages. However, a breach of warranty Property Law and the Law of Contract 4.33 does not relieve the injured party from the obligation to perform the contract, which continues in full force. An example of a warranty would be if A contracts to buy B's home and one term is that the master bedroom be painted before possession. If the breach is of a condition (a fundamental term which goes to the very heart or root of the contract), the injured party has three choices: to terminate the contract and sue for damages (and his or her obligations also end), continue the contract and sue for damages (as treating the breach as a breach of warranty), or continue the contract and sue for specific performance. The injured party can also refuse to perform his or her own obligations or to accept any further performance by the other party. Assignment A person can assign away benefits under a contract to a third party, and the third party can sue to enforce those benefits. Generally, a person cannot assign liabilities under a contract. For example, if a person owes money, they cannot assign that obligation to pay to another party. The doctrine of privity of contract says that only the parties to a contract have a right to sue or be sued under it. There are a few exceptions to this doctrine, one being assignment. In British Columbia, there are two types of assignment – statutory and equitable. A statutory assignment is one which complies with the legal requirements set out provincial legislation. For example, s. 36(1) and (2) of BC's Law and Equity Act states that a statutory assignment has three essentials: • the assignment is in writing; • the assignment is absolute (for the whole amount) and is unconditional; and • notice of the assignment has been given in writing to the original promissor. If any of the above essentials are missing, the assignment might still be an equitable assignment. An equitable assignment and a statutory assignment are enforced differently. In an equitable assignment, all three parties must be named as parties in a court action to recover the amount outstanding. In a statutory assignment only the original promissor and the assignee are named as parties to the action. The assignor is not a party to the action. Vicarious performance. It was stated above that no one can assign away liabilities under a contract. However, it is legal to have obligations performed by someone else. For example, a builder can require an employee or a sub-contractor to perform its obligations under a building construction agreement. This is called vicarious performance. Vicarious performance is not assignment. It does not result in the substitution of one of the original contracting parties for another. In the example of the construction agreement, the original building contractor is still liable to the other contracting party. The original building contractor could sue the sub-contractor if the sub-contractor has breached its own contract with the contractor. Vicarious performance is not permitted in the case of personal contracts. If A has contracted with B in reliance on B's personal skill, competency, judgment, taste, or other personal qualification, the law presumes that the contract is one of a personal nature. REMEDIES The main remedies awarded by the courts in contract law are damages, specific performance, injunc- tion, and quantum meruit. Damages is the only common law remedy available for breach of contract. The other three remedies are equitable remedies. Anyone who can prove that he or she has suffered loss as a result of a breach of contract is entitled to be awarded damages. However, an innocent party is not automatically entitled to an equitable remedy for breach of contract. Those remedies are only granted in the court's discretion. Therefore, delay in bringing the court action or the conduct of the party not in breach can result in the court refusing equitable relief. 4.34 Chapter 4 Damages Damage awards are intended to put the parties in the position they would have been in if the contract had been performed. The leading case on this subject is Hadley v. Baxendale, which established that damages which flow naturally from the breach or which must have been foreseeable by the parties at the time they entered into the contract are properly recoverable. In both cases, the damages must be the probable result of the breach. However, an injured party does have a duty to mitigate damages i.e., they must do what any reasonable person would do to keep losses at a minimum. Damages are not always established by the courts. Sometimes the parties agree in the contract itself on what the damages will be. When the breach occurs, this agreed amount might be higher or lower than the actual damages suffered. The courts have held that such a clause is enforceable if it amounts to a genuine pre-estimate of the foreseeable damages if a breach should occur. Otherwise it will be regarded as a penalty and will be unenforceable. Specific Performance Specific performance means that the court will order the terms of the contract to be carried out instead of awarding damages. Specific performance is an equitable remedy granted at the discretion of the court. It will not be exercised when damages are considered to be an adequate remedy. As a result, specific performance is only granted in a contract for the sale of property where the property is unique to the extent that its substitute would not be readily available. The Supreme Court of Canada has recently observed however that because residential, business and industrial properties are now mass produced in much the same way as other consumer products, specific performance should not be granted as a matter of course. With regard to personal property, specific performance would only be awarded for goods which are rare or of unique value, such as antiques. Injunction An injunction can do two things: • it can stop a party from doing something (e.g., selling property to someone else when the vendor has contracted to sell it to the plaintiff); • it can require a party to do something. In this case it is called a mandatory injunction. Disobedience of an injunction could result in liability for contempt of court. Like specific performance, an injunction is a supplementary, equitable remedy and will only be granted where damages will not provide an adequate remedy. Quantum Meruit The principle of quantum meruit was introduced earlier in the chapter. When a person requests the ser- vices of another in circumstances in which it is reasonable to conclude that the services would be paid for, but no price has been fixed, the law implies a promise to pay a reasonable sum. This principle also applies to goods supplied on request where no contract price is fixed. In such cases the market value of the goods would be the starting point for deciding their reasonable worth. CONCLUSION This chapter has covered the essentials of contract law and the law related to real property. The chap- ter is not intended to offer an exhaustive coverage of this area, since entire legal textbooks are devoted to this topic and even to individual sub-topics within it. The goal of the chapter is to offer a gen- eral review of legal foundations for finance professionals, such that the study of law as it specifically relates to mortgages in the next chapter has more meaning. Having laid that foundation with the basis covered, our analysis in the next chapter focuses on mortgage law.