Section 80 of The Manitoba Real Property Act (the “MRPA”) provides that in the absence of “fraud”, when you acquire an interest in land from an owner and that interest is subject to a prior existing but unregistered claim or interest, in all but a few seldom encountered situations, you will acquire your interest free from the unregistered claim or interest. The legislation goes on to state that it is not fraudulent on the part of the acquiring party that it has knowledge of the existence of the unregistered claim or interest. One of the policies behind this rule appears to be to better ensure the free flow of dealings in real estate. It is inherent in the “philosophy” underlying the enactment of The Real Property Act (and other similar legislation in other jurisdictions) that the current title maintained by a public registry system is “everything”. The idea is that to the greatest extent practically possible, all interests in or claims against a particular parcel of realty should be simply and quickly ascertainable by looking at the current title thereto.
Based on Alberta legislation similar to Manitoba’s, the Alberta Court of Appeal recently reviewed and applied this rule in the Angus Partnership v Salvation Army case (the “Salvation Army Case” (judgement June 1, 2018). The Court considered whether or not the purchaser of realty was obliged to take title subject to a previously created – but unregistered and unknown to the purchaser – interest therein.
The Salvation Army had operated the Grace Hospital in Calgary for many years prior to September, 1969. At that time, the Province of Alberta purchased an “equity interest” in the hospital. Part of that arrangement was that, provided that the Salvation Army was continuing to operate the property as a hospital, it had the right to give notice to the Province thereby requiring the Province to purchase the hospital, subject to certain terms and conditions of closing. The Salvation Army discontinued use of the property as a hospital in 1995. In 1997, the parties entered into a “memorandum of understanding” which amended the previous arrangement. The modified agreement provided that upon termination of the previous equity agreement, the Salvation Army became obliged to sell the hospital to the Province and the Province became obliged (and entitled) to purchase the hospital, again, subject to certain closing conditions. For some reason (perhaps inadvertence), there was no termination of the original equity agreement. Odder still was the fact that no caveat was registered against the property’s title by the Province giving notice of its rights under either the original equity agreement or the modification thereof by the memorandum of understanding. In 1998, Angus entering into an agreement with Salvation Army to purchase the hospital. At the time that it entered into this agreement, the purchaser was not aware of the pre-existing – but unregistered – arrangements between the Province and the Salvation Army. After the contract date, but before closing, and upon conducting due diligence, the purchaser discovered the existence of the pre-existing arrangements and requested that the Province’s rights be satisfied or removed by the seller. With the closing rapidly approaching, the purchaser requested that the same be delayed pending satisfactory disposition of the Province’s position and as well, for other reasons relating to zoning and planning approvals. When it received no satisfaction with respect to these matters, the purchaser balked at closing. It then fell to the Court to determine whether or not the purchaser was entitled to repudiate.
Clearly, the purchaser did not wish to acquire ownership subject to the Province’s interests and claims. So the question before the Court was, in essence, whether or not the purchaser would have been able to acquire title free of the Province’s interest given that the Province had not registered notice of its interest and given the circumstances existing in the Salvation Army Case.
The Court held that the purchaser (Angus) was not entitled to repudiate its purchase transaction with the Salvation Army. In the circumstances of the Salvation Army Case, if it had closed the transaction, the purchaser would have acquired title free and clear of the Alberta government’s interest/claim. This was because the Alberta counterpart to the MRPA’s Section 80 provided that the purchaser would not have been burdened with the Alberta government’s unregistered interest even though the purchaser had knowledge of that interest. Its conduct, in the circumstances, did not amount to fraud. This decision mirrors the Manitoba Court of Queen’s Bench case holding (Willman v. Ducks Unlimited) in which Justice Martin Freedman held that a person acquiring an interest in realty who is aware of a pre-existing unregistered claim or interest, but whose conduct does not amount to fraud, will acquire its interest free and clear of the unregistered interest/claim.
As the Alberta Court of Appeal stated, “something more” than mere notice of an unregistered claim/interest is required in order to cause the party acquiring the interest to acquire with/subject to the “burden” of the unregistered claim/interest.
So the question becomes what is the “something more” that is required to establish fraud in order to make an acquiring interest holder subject to a pre-existing unregistered claim or interest? In this regard, the Court noted the following:
- Where the acquiring interest party both knows of the unregistered interest and understands that by registering its own interest before the unregistered party registers, such registration will defeat the unregistered interest (insofar as the realty is concerned), such knowledge and understanding will not be considered to be fraudulent conduct on the part of by the acquiring interest party who registers.
- In the Salvation Army Case, if there was any fraud – or at least wrongdoing – it would appear to have been on the part of the vendor by it contracting to sell the property with knowledge of Alberta’s earlier granted right to purchase. The “fraud” required to defeat the acquiring interest party’s rights is usually committed by the acquiring interest party, not the vendor.
- Previous Alberta Court decisions have held that the Courts must be very wary of disrupting the “anchor principle” of the (Alberta) Torrens system of land registration, “namely, indefeasibility”. The system is intended to provide substantial assurance as to certainty of title. (Presumably) the legislature understood that the application of the principle of indefeasibility might result in injustices occurring, but in those cases, there might well be a cause of action against any wrongdoer. Also, the Torrens system reimbursement fund is available to provide at least some compensation to at least some persons who suffer losses by reason of the operation of the system.
So it would appear that at least one of the “morals” of the Salvation Army Case is that if you have/acquire an unregistered claim or interest, you should register it against the relevant title(s) as soon as possible. The Court noted that the Alberta government was not required to register, but it did have the choice to do so, and for whatever reason, it chose not to register.
For more information please contact Scott Ransom.