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					                                      CHAPTERS 14

                                 INTERESTS IN LAND

LEARNING GOALS
   To understand the various estates and interests in land.
   To examine the title to land and the registration of property interests.
   To understand leases and their uses.
   To consider land as security for debt.
   To understand mortgages as an interest in land.

CHAPTER COMMENTARY
Chapter 14 introduces the law of real property, and with it, the legal terminology associated
with land law. The distinction between real and personal property should be pointed out
when dealing with this topic, as students often tend to consider property in a very general
sense, without realizing that in some cases things that would normally be personalty become
reality when attached to land in the form of fixtures, etc. The significance of a chattel
becoming a fixture is examined in the text on p. 374.
         The nature of land holding in Canada is sometimes a revelation to students, as most
have considered land ownership to be absolute, without realizing that the "owner" simply
holds an estate from the Crown, and it is the Crown that is the true owner. A useful
approach in dealing with the different estates in land might be to start with the Crown, show
the Crown patent grant in fee simple, then work from there for each different type of estate.
In this fashion, the reversion to the owner of the fee where a life tenancy has been granted
may be highlighted as well. Lesser interest in land, and the use of restrictive covenants to
control the use of land, etc. are also concepts to review in class, either by way of example, or
using the case problems at the end of the chapter
         Of some importance in any discussion of real property law is the difference between
the two major land registration systems. Under the Registry System for example, a
possessory title to land may arise by way of adverse possession, but may not under Land
Titles. Consequently, these differences should be emphasized in any review of the topic.
The differences in determining a 'good title' under each system should also be noted.
       The leasehold interest has been subject to a certain amount of legislative change
during the past decade as a result of organized tenants groups and their supporters seeking
greater security of tenure, and the right to safe accommodation. The pressure from these
groups has resulted in rent controls in a number of provinces, and a greater obligation on the
landlord to maintain leased premises in not only a safe, but habitable condition. The law
varies from province to province, and the particular jurisdiction should be consulted for
these matters before class discussion of the law takes place. The nature of a tenancy is
readily understood by students, but the sub-tenancy and the assignment of a lease is often
confused. Some time might be spent discussing these differences in class.
         Leasehold interests are basically concerned with the landlord-tenant relationship. It
is a very old type of land relationship that should be distinguished from a license, where the
licensee does not acquire exclusive possession of the property. See page 370.
         Leases are always for a specific term, under which the tenant acquires exclusive
possession of the property for the term, provided that the rent is paid, and the other
conditions of the lease met. In the event of default under a lease by the tenant, the landlord
may re-enter, or take steps to have the tenant evicted, depending upon the jurisdiction, and
the type of tenancy.
       The law of mortgages in Canada is complicated to a degree because the two land
registration systems (in addition to the system in the Province of Quebec) affect the nature
of the instrument. In addition, each province has altered the rights of the parties to some
extent, with the result that much provincial variation exists.
         From a conceptual point of view, the creditor, in return for the loan of money, either
takes title to the debtor's land by way of the mortgage, or obtains a claim or lien on the land
in the case of a charge under the Land Titles System or the hypothec (used in Quebec).
Using the mortgage as an example, the transaction may be graphically displayed in this
manner:

Mortgage transaction

                                               transfers (charges) legal title to B,
                                               but retains possession of land
Party A                                                                                 Party B
(Mortgagor)                                                                            (Mortgagee)

                               B loans money to A with land
                               as security

Discharge of mortgage


                                                 repays loan to B

        Party A                                                                          Party B
       (Mortgagor)
       (Mortgagee)

                               B reconveys title of land to A
                               by way of discharge
     In the case of a charge, the creditor has only a secured interest in the debtor's land,
and on repayment of the loan, the cessation of charge , given by the creditor as receipt of
payment, extinguishes the claim against the debtor's land.

The difference between first and second mortgages may be explained by way of diagram:
E.g:


                                               transfers (charges) legal title to B,
                                               but retains possession of land
               Party A                                                                        Party
B
             (Mortgagor)
Mortgagee)

                               B loans money to A with land               (holds legal mortgage)
                               as security



                                           C loans money to A with right of redemption as security




  Mortgage of equity
 (right to redeem from B)


                                               Party C (Equitable mortgagee, or Second Mortgagee)



        The terminology used in connection with mortgages is important and should be
stressed in class discussion. In particular, the terms mortgagor and mortgagee should be
properly used to identify the parties to the transaction.


REVIEW QUESTIONS

1. Describe briefly how land holding developed in Canada, and identify the system upon
which it is based.

Answer:
Land holding in Canada was based upon the system in England, which in turn dates back to
the feudal system introduced by the Normans in 1066. Under this system, all of the land is
owned by the Crown, and estates are granted to individuals.

2. Explain the term “freehold estate”. How does this term apply to land?
Answer:
A freehold estate is an estate in land where the land may pass on by intestacy or by will to
the heirs of the grantee if the grantee should die. It may also be sold by a grantee during his
or her lifetime.

3. What lesser estates may be carved out of a estate in fee simple?

Answer:
Lesser estates would include (1) life estates (2) leasehold estates.

4. Once land is granted by the Crown, how is it recovered?

Answer:
The Crown recovers granted land by way of expropriation, if the land is required for public
purposes.

5. How are condominiums normally established?

Answer:
A condominium is usually established by a developer who buys the land, constructs the
building, follows the necessary steps for creating the condominium (declaration, etc.) and
forms the corporation to manage the operation. The developer then sells the individual
units.

6. Indicate how a condominium organization deals with the problem of a unit owner who
fails to contribute his or her share of the cost of maintaining the common elements of the
condominium.

Answer:
If a unit owner fails to pay common expenses, the corporation is usually entitled to claim the
expenses as a lien against the unit, and if necessary have the unit sold to cover the unpaid
amount.

7. In what way (or ways) would an easement arise?

Answer:
An easement may arise by (1) express grant (2) prescriptive right (3) by necessity.


8. Under what circumstances would a restrictive covenant be inserted in a grant of land?
Give three common examples of this type of covenant.

Answer:
Restrictive covenants are used to control the use of land conveyed to another. For example:
restrictions on the size of a house or building that may be built on the land, restrictions as to
the type of use made of the property (residential, commercial, etc.), or alteration of
landscape (cutting of trees, excavating, etc.).


9. What is the purpose of a land Registry System?

Answer:
The land registry system is a public registry system where deeds and other interests in land
may be recorded.

10. Explain how the Land Titles or Torrens System differs from the Registry System.

Answer:
The Land Title System differs from the Registry System in that the Crown certifies the title
of the registered owner under the Land Titles System, while under the Registry System, the
individual must determine the validity of a registered owner's claim to the land.

11. What special advantages attach to the Land Titles System?

Answer:
Under the Land Titles System the title of the present 'owner' of the land is confirmed and
warranted by the province as it is represented on the land register. There is no need to
search the title to establish ownership. It provides greater certainty of title.

12. Distinguish joint tenancy from tenancy-in-common.

Answer:
A joint tenancy is the ownership of an individual interest in common in land whereby if one
tenant should die the surviving tenant becomes the absolute owner in fee simple of the
interest. Under a tenancy in common the interest of each tenant passes to his/her heirs by
will or intestacy on his/her death.

13. What is the legal nature of a leasehold interest, and how does it arise?

Answer:
A leasehold interest is an estate inland whereby the lessee acquires possession of the
property for a fixed period of time.

14. In what way (or ways) does a tenancy differ from a license to use property?

Answer:
A tenancy differs from a license in that a tenancy entitles the tenant to exclusive possession
of the land, whereas a license entitles the licensee the use of the land in common with others.

15. Explain how the term of a tenancy may be determined where the tenancy agreement is
not specifically set out in writing.
Answer:
The term of a tenancy when unspecified is usually determined from the periodic payment of
rent. If rent is paid monthly, the term is considered monthly, etc.

16. Outline the covenants which a tenant makes in an ordinary lease. Explain the effect of
the tenant's non-compliance with these terms.

Answer:
The ordinary express covenants which a tenant makes are: (1) to pay rent (2) to repair (3)
not to sub-let without permission (4) insure (5) pay taxes (6) not to commit waste. A
breach of any covenant would entitle the landlord to take action on the covenant.

17. What remedies are available to a landlord where a tenant fails to comply with the terms
of the lease?

Answer:
The landlord may: (1) take action on the covenant to recover unpaid rent (2) distrain
against the goods of the tenant (commercial leases) (3) re-enter the premises. For minor
breaches of the lease the landlord may only take legal action for the damages and for an
injunction.

18. In a commercial lease in most provinces, landlords may distrain against the chattels of
the tenant for non-payment of rent. What does this mean, and how is it accomplished?

Answer:
To distrain means to seize the chattels of the tenant for rent due and owing, and to have
the chattels sold if the rent is not paid.

19. Define the term “mortgage” as an interest in land.

Answer:
A mortgage is an instrument whereby an owner of land pledges the title or interest in land as
security for the debt, but remains in possession of the property until such time as default
occurs.

20. Outline the nature of a mortgagor’s interest in the mortgaged land.

Answer:
A mortgagor of land retains an equity of redemption, which entitles him to a reconveyance
of the title when the debt is paid.

21. How does a "first" mortgage differ from a "second" mortgage?

Answer:
A first mortgage is the "legal" mortgage in the sense that the legal title to the property passes
to the mortgagee. A second mortgage is an equitable mortgage in the sense that it is a
mortgage of the equity of redemption.
22. What factors must be considered by a person who wishes to extend a loan of money to
another on the security of a second mortgage?

Answer:
The lender must be aware that there is a risk that the mortgagor may default on the first
mortgage, in which case the second mortgagee would be obliged to put it in good standing.

23. Why do mortgages usually contain an acceleration clause? What is the effect of the
clause if default occurs?

Answer:
If a mortgage is repayable by installments, default on each installment would require
separate legal action for payment. An acceleration clause renders the entire balance due an
owing when default first occurs.

24. Explain the relationship that exists between a mortgagee and a person who acquires the
mortgaged property from the mortgagor. Does the original relationship of
mortgagor-mortgagee continue as well?

Answer:
The mortgagee and the third party have privity of estate between them. The relationship
between the mortgagee and the mortgagor continues to exist, however, and the mortgagee
may still look to the original mortgagor for payment if default by the third party occurs.

25. Indicate what the rights of a mortgagee would be if a mortgagor defaulted on the
payment of the mortgage.

Answer:
On default, the mortgagee may take action against the mortgagor on the covenant for
payment, or may institute foreclosure or sale proceedings. As well, the mortgagee may
demand possession.

26. If the original mortgagor sold the mortgaged lands to a purchaser, and the purchaser
failed to make payments or the mortgage, explain the possible courses of action which the
mortgagee might take.

Answer:
Causes of action open to the mortgagee would be: foreclosure, sale and possession of the
mortgaged premises, or action against the original mortgagor on the covenant for payment.

27. What is the normal procedure used to re-vest the legal title of a property in the
mortgagor when the mortgage debt is paid? Does this differ in the case of a charge?
Answer:
The normal procedure is to deliver a discharge, which is a statutory re-conveyance, and
receipt for payment. A charge is extinguished by a cessation of charge, which removes the
charge from the title of the property.


DISCUSSION QUESTIONS

1. The Metro Manufacturing Ltd. President requires advice on not only the purchase of a
20 hectare parcel of land, but also information on financing the building. What
information would the lawyer provide concerning the purchase? What precautions would
be suggested? What would be the most likely financing for the construction of the new
production facility?

Comment:
The advice that the lawyer might give Metro Manufacturing Ltd. would concern the
process of buying the property, and the matter of financing the purchase. Apart from the
need to ensure that the seller had a good title to the property, the lawyer would probably
wish to confirm that the municipality in its zoning had designated the land for industrial
use, and in particular for the type of manufacturing carried out by Metro Manufacturing.
He might also suggest an environmental audit to ensure that the property is clear of any
environmental hazards (this is covered in Chapter 16, but might be raised here as well).

On the question of financing, a building mortgage might be suggested as a means of
covering construction costs as the building is erected. Other suggestions by the lawyer
might include insurance of the building as well as an explanation of the nature of the
mortgage and the rights of the mortgage.

2. Southside Land Development Corp. offered to sell Trend Contracting Ltd. a small
block of vacant land in a large city for $50,000. Southside Land Development Corp.
presented a deed describing the property and showing Southside Land Development
Corp. as the owner in fee simple. What information should Trend Contracting Ltd. obtain
before delivering the $50,000 to Southside Land Development Corp.?

Comment:
Trend Constructing Ltd. would probably wish to examine the title to the property to
ensure that the seller is indeed the owner in fee simple, and that the property is free from
any mortgages, easements or other restrictions. See comments with respect to Case 1
above for further considerations.

3. The owner of a condominium unit also owned an exclusive use parking space on a
surface lot facing a sidewalk and street. The owner rented the space to his friend, who
parked her chip wagon in the space. She sold french fries and soft drinks to the public
from the location. The other residents of the condominium objected. Advise the unit
owner of his rights (if any), and the rights of the other residents.
Comment:
Under most condominium laws the unit owner also acquires exclusive use of the parking
space for the purpose of parking or storing a motor vehicle. By leasing the space for
commercial purposes, the unit owner is essentially changing the use of the space, and
would probably require the consent of the condominium corporation in order to do so.
The other residents may well object to the commercial use of the space, and stop the
selling of the French fries and soft drinks.

4. The Ready Packing Co. leased a large commercial building for its business. The lease
called for monthly payments of $5,000 per month on a two-year lease. At the end of the
first year, the Ready Packing Co. fell into arrears on its monthly rent payments. Three
months' rent is now due and owing. What action might the landlord take against the
Ready Packing Co.?

Comment:
Since the tenant is in default under the lease, the landlord may seize the goods of the
tenant, and sell them to cover the arrears of rent. If the landlord wished to evict the
tenant it could do due to the default by Ready Packing Co.


COMMENTS RE: DISCUSSION CASES

CASE 1
Main Sheet Shopping Centre Inc. leased a small shop in a busy strip mall to Agricola for
the purpose of operating a convenience store. The lease was drawn for a three year term
commencing July 1st. The lease provided for a total rental payment of $36,000 payable
$1,000 per month. Agricola paid the first month’s rent, and moved into possession.
        A few months later, when the rent had not been paid, the company manager
visited Agricola’s shop to collect rent, only to find that Agricola has sold his business to
Primo, contrary to the lease which could not be assigned without consent of the company.
The manager told Primo that Agricola had no right to assign the lease, and the company
did not wish to rent the shop to Primo.
        Primo at this point decided not to pay the rental payment owing and decided to
find Agricola to demand his money back. In the meantime, the manager decided to treat
the lease as being in breach, and instructed a licensed bailiff to collect the rent that was
now payable.
        The bailiff went to the store, changed the locks, and took an inventory of stock
and equipment that he valued at $8,000 for the stock and $4,000 for the equipment. He
then posted a notice on the shop informing the public that the landlord had taken
possession for non-payment of rent.
        Agricola and Primo were duly notified that he had distrained the chattels on
behalf of the landlord, and that they had five days to redeem the chattels by payment of
the arrears of rent, failing which he would sell the equipment.
        When Agricola and Primo did not pay the rent, the bailiff unsuccessfully
attempted to sell the business. Main Street Shopping Centre made no attempt to rent the
store, but retained the non-perishable stock and equipment. Six months later, the
company brought an action against Agricola for breach of the lease.
        Discuss the issues raised in this case. What arguments might be raised by each
party. Render a decision.
Comment:
The first issue to be considered in this case is the nature of Agricola’s liability as a tenant.
Could the landlord distrain against the chattels of Primo (who was a sub-tenant) when the
rent was overdue? Was the landlord entitled to withhold consent when Agricola transferred
the business to Primo? Can the landlord retain the chattels and stock and still claim
damages? Does it make any difference if the landlord made no attempt to lease the premises
after evicting Primo?
        According to the case of Fuda et al. v. D'Angelo et al. (1974), 2 O.R. (2d) 605,
when the landlord evicted the tenants, changed the locks, and attempted to sell the goods
and equipment of the tenants "as a going concern", his actions constituted a termination of
the lease.
        In order to collect the unpaid rent, the landlord would be obliged to show that he had
given notice to the tenant that he intended to hold him responsible. This he would be
obliged to do if he expected to recover from Agricola.

CASE 2
Housing Corporation Ltd. constructed a luxury single family dwelling on a suburban lot
in a new development. The building was financed by a $200,000 building mortgage from
Residential Mortgage Inc. Housing Corporation sold the house to Hunter for $275,000,
with payment consisting of a $75,000 cash payment and assumption of the mortgage.
         A few years later, Hunter sold the property to Smithers. Smithers purchased the
property for $280,000, part of the purchase price being the assumption of the mortgage.
Smithers found the property to be too large for his small family, and sold the house to
Leblanc for $275,000. The price again included the assumption of the mortgage. At this
time, the balance owing on the mortgage was $170,000. Leblanc placed a second
mortgage on the property for $50,000 with Second Mortgage Financing Inc.
         Unfortunately, Leblanc ran into financial difficulty, and the mortgages fell into
arrears.
         Outline the rights (if any) and liability (if any) of each of the parties if Residential
Mortgage Inc. should decide to take legal action on the mortgage. What might be the
best approach for the company to take? Render a decision.
Comment:
This case concerns the rights of mortgagees on default, and the obligations of both the
original mortgagor and the person in possession of the property when default occurs.
With respect to the original mortgage between Housing Corporation Ltd. and Residential
Mortgage Inc. it should be noted that Residential Mortgage Inc. may decide to take action
against Housing Corporation Ltd. on its covenant to pay in the mortgage. If it decides to
do so, and Housing Corporation Ltd. pays the balance owing, it must assign the mortgage
to Housing Corporation Ltd. in order that Housing Corporation Ltd. will be in a position
to foreclose on the property or seek payment from the subsequent encumbrancer, Second
Mortgage Financing Inc.
       Second Mortgage Financing Inc. is in a difficult position where it must pay the first
mortgage in order to protect its investment in the property. If it does so, it is then in a
position to foreclose or sell the property to recover its investment.
       Note that both Hunter and Smithers, who owned the property at one time, would
not be liable on the first mortgage after they sold the property unless they had signed an
assumption agreement with the mortgagee that contained a covenant to pay.

CASE 3
East County Condominium Corp. No. 20 was formed just over a year ago, with all the
usual condominium documentation. Contained in its declaration was a reference that
common expenses included municipal water charges, unless the same were separately
metered for each unit. There were 90 units in the building, one of which was a ground-
floor restaurant unit. The restaurant represented 10 percent of floor space, and therefore
10 percent of common expenses. Each of the other 90 dwelling units would bear 1
percent of common expenses.
        After examination of the accounts for the first year of operation, the condominium
found that the restaurant accounted for almost half of water charges, and the amount
budgeted by the corporation of $60,000 would fall short of actual costs by over $20,000.
The directors passed a motion that a meter be installed on the water pipes to the
restaurant unit to charge it for actual use. The action was ratified by the unit holders 89
to 0, with one abstention (the restaurant owner) in protest.
        The owner of the restaurant unit applied to the court for relief, stating that water
rates had figured into her calculations on whether to purchase the unit, and that the same
calculations must have figured into the condominium’s decision to sell the unit to her.
The condominium had the power to write what it has written and it should be bound by
its calculation. The corporation had set the price for her commercial unit, knowing it
would contain a restaurant. The restaurant owner acknowledged she was prepared to
suffer her fate, should the condominium on a vote, decide to install meters to all units.
        Elaborate on the issues in the arguments and render a decision on behalf of the
court.

Comment:
The operation of the condominium is subject to the charges set out in the declaration, and
the system of allocation of all expenses was determined on a floor space basis. The actions
of the corporation to assess the restaurant extra may be argued as discriminatory in the sense
that only the one unit would be metered and subject to a special levy. The corporation
would probably be obliged to place all units on meters to fairly apportion the charges.
However, this may not make economic sense where only one user was responsible for the
excessive use. In the case upon which this case was based, the court held that the existing
system of charges represented unjust enrichment for the restaurant owner and imposed an
undue hardship on the rest of the unit owners. The court then went on to decide that the
metering of the one unit would fairly apportion expenses. See: York Region Condominium
Corporation No. 771 v. Year Full Investment (Canada( Inc. (1992) 10 O.R. (3d) 670 (Ont.
Ct. Gen. Div.).

CASE 4
The Duffer’s Golf Club owns a large block of land that was located at the edge of a
municipality. Most of the land was developed as an 18-hole golf course. A small stream
runs through the golf course part of the property and eventually drains into a lake some
distance away. The stream also passes through the municipality that is located upstream
from the club property.
        Some years after the golf course was developed, the municipality installed new
storm sewers in an area of the city and constructed them in such a way that, in a heavy
rain, overflow from the sewers would drain into the stream.
        Shortly after the construction of the new sewers, several days of heavy rains
resulted in a large quantity of water from the storm sewers being discharged into the
stream. This in turn produced flooding of the stream and serious erosion of the banks of
the stream where it passed through the golf course. Damage to the club property was
estimated at $60,000.
        The golf club instituted legal proceedings against the municipality for the damage.
Discuss the arguments that might be raised by each of the parties, and render a decision.

Comment:
This case is concerned with riparian rights, as the club owns land that is adjacent to the
watercourse. The issue here is can an upstream user (the municipality) introduce additional
water into the stream in such quantity that it damages the property of the downstream user?
         The municipality might argue that it was simply directing the natural flow of water
(rain water) into the stream. It might also argue that the downstream user may object to
actions that decrease the flow of water. Would these be valid arguments?
         The club would probably argue that the upstream user may not do anything with the
water flow to damage the downstream users enjoyment of the stream. The club might also
argue that the municipality should have foreseen the likelihood of downstream damage by
its actions of directing the additional water into the stream.
         In the case upon which this fact situation was based, the court held that the
municipality was liable for the damage to the downstream user. See: Scarborough &
Gulf Country Club v. City of Scarborough et al. (1986), 55 O.R. (3d) 193.

				
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