Message from the Editor
Ray Mikkola, Pallett Valo LLP, Toronto
Welcome to the Winter 2011/2012 CBA National Real Property Section Newsletter!
Message from the Chair, Real Property Section
Timothy Kennedy, Vincent Dagenais Gibson LLP, Ottawa
The CBA National Real Property Section held its annual executive meeting in Ottawa, Ontario on September 24, 2011.
Up, up and away (and still able to close)
By Jeffrey Schwartz, Schwartz & Schwartz, Toronto
Scenario 1: Okay, so it's Friday at 2 p.m.: it’s a long weekend pending and you are looking forward to a) going to the cottage, b) spending the long weekend relaxing, or c) going out of town to visit with family or friends. You have just signed your last E-Reg Transfer for completeness...
Electronic real estate transactions
By John Gregory, Lawyer and Slaw columnist, Toronto
Much of the legal status of electronic communications in Canada (and elsewhere) rests on legislation based on the United Nations Model Law on Electronic Commerce of 1996. The Model Law’s main Canadian implementation has been through the Uniform Electronic Commerce Act, adopted in 1999.
Default interest rates: Section 8 of the Interest Act
By Silvana D’Alimonte and Beth Earon, Blakes LLP, Toronto
Section 8 of the Interest Act (Canada) prevents a lender from charging a higher rate of interest following a default on a mortgage of real property than that charged during the term of the mortgage.
Mortgage/security interests in "fixtures"
By Edward D. Brown, Pitblado LLP, Winnipeg
Where the lender is taking only a personal property security agreement, which extends or could extend to fixtures, the lender should also register both a financing statement in the Personal Property Registry and a PPSA (Fixtures) Notice against the relevant realty.
Online PD: Understanding Terms of Art in Real Estate Transactions
In case you missed it, the archived presentation and materials can be purchased on the event webpage. To purchase the recording, click on the blue 'REGISTER NOW' button.
Message from the Editor
By Ray Mikkola
Welcome to the Winter 2011/2012 CBA National Real Property Section Newsletter!
This edition includes articles of interest to the real estate practitioner from coast to coast to coast, as follows:
Speaking of “interest,” Silvana D’Alimonte and Beth Earon’s article on the federal Interest Act delves into an often overlooked section, one dealing with a prohibition on charging a higher rate of interest after default than before default. If you are like me, you have seen many instances of bonus payments, penalties and charges that likely fall afoul of the Interest Act.
Edward D. (Ned) Brown writes about his concern that even mortgages of realty only should not rely on the common law rule that fixtures are automatically included in the mortgage (at least in Manitoba). Ned says you also need to register both a financing statement in the Personal Property Registry (which describes the present and after-acquired goods affixed/to be affixed to the subject realty), plus, based on such Personal Property Registry registration, additionally register a PPSA (Fixtures) Notice against the title(s) to the subject realty. That’s certainly not the practice in Ontario, but he makes a good point based on the Manitoba Law Society’s interpretation that the provisions of the PPSA to reverse the common law rule that goods affixed to land become real property and are governed by real property laws.
Please do read John Gregory’s very interesting piece on the continuing requirement to get signatures on purchase agreements, thanks to the provisions of statutes such as the Ontario Statute of Frauds and an exception regarding real estate agreements in, for example, the Ontario Electronic Commerce Act (the ECA). These days, many if not most real estate transactions are based on agreements that are “signed” by fax or by pdf scans. Section 31 of the ECA says that the ECA does not apply to “…documents, including agreements of purchase and sale, that create or transfer interests in land and require registration to be effective against third parties.” John wonders, as do I, if special status for such documents is still required. I invite you to write to me and tell me why special status is necessary in your province.
John’s article also makes me remember that there is such a thing as the sealed contract rule, at least in the common law provinces. It is of misty origins, but it limits the ability of a plaintiff to go behind some contracts if they are signed under seal, all according to Friedmann Equity Developments Inc. v. Final Note Ltd.,  1 S.C.R. 842. When a contract is executed under seal, an undisclosed principal can neither sue nor be sued upon the contract. Many of us had assumed that the rule was not good law because corporations are not even required to have a corporate seal in Ontario at least. According to the Supreme Court of Canada (5-0), we were wrong, wrong, wrong.
Jeff Schwarz writes an updated version of his grade 4 paper: What I did on my Summer Holidays. Turns out, he closed real estate deals whilst sipping Chardonnay in the XVI Arondissement. But he did so using his Ontario EReg key that works as effectively on the Seine as in his office at home. Don’t believe me? Read on!
Say, here’s something all lawyers across the country would like to hear about: an update or final report on the Wirick matter in B.C. Please drop me a line with any such update.
Finally, we have in this issue the inaugural message from the CBA National Real Property Section’s new (September 1, 2011) Chair, Tim Kennedy.
I am currently planning on attending the CBA Mid-Winter meeting in Mexico. I hope to see you there! I’ll be the contented looking pale guy under the sombrero.
Raymond H. Mikkola practices law at Pallett Valo LLP in Toronto.
Message from the Chair of the CBA National Real Property Section
By Timothy Kennedy
The CBA National Real Property Section held its annual executive meeting in Ottawa, Ontario, on September 24, 2011. The officers include myself, Susan Ledrew (St. John’s), Albina Moran (Winnipeg), Kevin Jaques (Regina) and Ray Leclair (Toronto). This year the officers met to discuss issues surrounding how to better serve our members from coast to coast. This is a long standing cornerstone of the National Section – to provide quality professional development programs and resources that are relevant to lawyers from St. John’s to Victoria.
On November 1, 2011, the Section offered an online webinar titled Understanding Terms of Art in Real Estate Transactions.
Jeffery Lem of Miller Thomson LLP and I shed light on the meaning of time-tested terms of art in real estate transactions. This program was designed for the new lawyer confounded by the lingo or the more seasoned real estate practitioner looking for a refresher on the correct use of terms of art when drafting contracts and negotiating real estate deals. More substantial than your average back-to-basics primer, this program aimed to help avoid common pitfalls resulting from a lack of understanding of the real meaning and impact of these terms.
The National Section is committed to issuing semi-annual newsletters covering cases and items of interest from across Canada, I invite you to visit the Section’s website regularly.
Timothy Kennedy practises at Vincent Dagenais Gibson LLP in Ottawa.
Up, up and away
(and still able to close)
By Jeffrey Schwartz
Okay, so it's Friday at 2 p.m.: it’s a long weekend pending and you are looking forward to a) going to the cottage, b) spending the long weekend relaxing, or c) going out of town to visit with family or friends. You have just signed your last E-Reg Transfer for completeness. You feel comfortable leaving the office early knowing your able staff will finish the job and close your transactions. Clients are well-served and you feel that technology has finally allowed you to close multiple transactions anywhere in Ontario.
It's Friday afternoon and you are finishing up a heavy month-end of residential transactions. The following week is clear and you have arranged to go to the Caribbean for a well-deserved vacation. Next week, while you are away, your staff will be working on reports and organizing themselves for the coming month’s closings.
Sound familiar? These are probably typical situations you have had over the years. I know I have. But, like all good things, there is also a glitch. After you have left the office in Scenario 1, or while in the departure lounge while waiting for your flight, you get a call from your office that one or more of your sale/purchase transactions did not close or somehow, the other side made a change to the document and your signature was wiped out and .... now what? Do you cancel your trip, do you turn around from your already two hour drive from the office? Are you fortunate to have another lawyer in your office to cover for you so that they can re-sign for completeness?
We all know that we are forbidden to have our electronic keys used by our non-lawyer staff. We are to guard our key and are the only authorized persons who can sign with it. So what to do?
Can a sole practitioner ever untether from the office and ensure compliance with the legal protocols governing the use of electronic keys and closing E-Reg transactions? Can you go away, and I mean away, and know that if you are required, you can ensure registrations go smoothly and in accordance with professional requirements? Yes you can!
About three years ago, I decided that I wanted to spend more time at home with my family. Over the years I have often used my Sundays as a day to catch up, clean up and even do some billings. While I usually accomplished a great deal on these quiet weekend days, I was finding myself so consumed that there was never really a break to re-charge. Also, getting away was an issue since I had to worry about what to do if there was a closing during my absence or worse, a closing was extended to close while I was away on a planned vacation or break (originally, that sale was scheduled to close on the last Friday before I departed).
My technology expert told me that I had a number of options. There are solutions available that allow linkage to your office computer to your laptop or your home computer that would allow you to log in from a remote site. The beauty of these programs is that while you are somewhere else, you are actually logging into your computer. And that means being connected to the computer upon which your Teraview software is loaded.
So, there I was in Europe, enjoying dinner with my wife in an outdoor café. It was 9 p.m. on a warm winter's night. There we were, my wife and I and .... my small E-machine 7" laptop. In this case, three was not a crowd! I turned on my laptop and waited while it searched and found a wifi hot spot. I could now use the internet. Once I had this connection, I used my program to log in to my office machine back in Toronto. While I was doing that, I also used my Yahoo account to call my clerk on her computer. After we live voice chatted about how much fun I was having and how miserable she was on a cold wintery day, she went to my desk and plugged my flash drive unit into my computer’s USB port. Using my laptop on the patio table, my program allowed me to take over my desk top office computer and proceeded to log into Teranet. I was able to go to an estate sale transaction docket, pull up the E-Reg Transfer review, discuss its provisions with my clerk (it was an estate sale and as it turned out, I had to make some changes to correct the date of death) and then sign. I could simultaneously chat with my clerk on my machine and operate on E-Reg. Once we were happy with the document, I signed for Completeness, logged off Teraview and my clerk then proceeded to close. I kept my Yahoo on while I enjoyed our meal and in short order, my clerk called me to advise that the transaction had closed!
My comments here are not to not recommend one program over another, rather, I suggest you investigate the different programs that are available. There are several. Simply type computer-to-computer communication and do your own research. I recommend and urge that whatever program you choose, that you buy the highest secured version available. Most of these programs have a free version; if you purchase an upgrade, you get a more secure version. It's not expensive and if having a very secure system in place for under a $100.00 gives you freedom to leave the office and travel, is there really any reason why not spend the money?
Since I have had this system installed on all our office computers, our tech support person has also been able to gain access to our machines without having to physically attend our offices from wherever he happens to be (including at the Consumer Electronics Show in Las Vegas!) He can, using this program, access any of our computers to deal with that unit’s issue, do whatever magic these guys do with our hardware and software and save my office aggravation, time and expense. In fact, he is able to guide the user from his off-site location when necessary by controlling the mouse and screen! By having access off-site that allows secure connections, there can be a real and considerable savings as well as time since your tech person can then essentially be available to you and your staff anytime.
I hope this helps you in your practice. By the way, just in case you are wondering, I did run this by Teranet and they had no issue. We have a real challenge in our area of practice. It's important to take advantage of the tools available to improve your efficiency but equally importantly, to allow you to cut the cord from the office and let you get away. Enjoy your away time!
Jeffrey Schwartz practises at the Toronto law firm of Schwartz & Schwartz.
By John Gregory
Much of the legal status of electronic communications in Canada (and elsewhere) rests on legislation based on the United Nations Model Law on Electronic Commerce of 1996. The Model Law's main Canadian implementation has been through the Uniform Electronic Commerce Act, adopted in 1999. All of the common law provinces, the Yukon and Nunavut have enacted the Uniform Act, as shown here. Quebec adopted its Act to establish a legal framework for information technology in 2001, mainly based on the principles of the Model Law though not using the Uniform Act as its template. The electronic documents part of the federal government's Personal Information Protection and Electronic Documents Act (PIPEDA) was inspired by the draft of the Uniform Act available in mid-1998 when the federal statute was prepared, though some significant variations were made.
The purpose of the Model Law and the Uniform Act, and thus of most Canadian legislation, was to remove barriers to the legally effective use of electronic communications. They did not intend to regulate that use. They wanted to be sure that legal rules that appeared to require ink and paper, such as writing and signature requirements, did not stand in the way of electronic communications. They did so by setting out a 'functional equivalent' to the existing form requirements. Electronic communications that performed the specified function were taken to satisfy those form requirements.
These were new principles in the mid-1990s when UNCITRAL developed them. People were not sure whether they would work, and thus how widely it was safe to apply them. As a result of that caution, the Model Law allows for exceptions to the operation of its rules, though it does not say what those exceptions should be. Thus articles 6 (on writing requirements), 7 (on signatures) and 8 (on originals) all have a paragraph reading 'The provisions of this article do not apply to ...'. Each implementing country was left to decide the scope of the rule and what to carve out of it.
In deciding what to include or leave out, Canada had to consider the two main features of the Model Law that were adopted by the Uniform Act: they were minimalist and they were technology-neutral. They set out their rules for functional equivalence but did not say how to achieve them or what technology to apply to do so. (Quebec's statute was less minimalist but still technology neutral. Parts of PIPEDA are not technology neutral.) Parties to electronic transactions were left to decide what was prudent. Just as a contract written on a Kleenex tissue in pencil, signed with an X, can be a legally effective contract but is unlikely to be acceptable in commercial practice, so too certain kind of electronic communications will not satisfy basic business considerations. The legislation does not make that choice for the users.
With such considerations in mind, the Uniform Law Conference excluded from the Uniform Act a number of communications: wills, testamentary trusts, personal powers of attorney and land transfers that would require registration to be effective against third parties. These documents shared the characteristic that they are often prepared by people without legal advice, people who may have little knowledge of what makes an e-document secure. The decision about prudent practice might be particularly risky to leave open for those people.
In addition, not everyone might appreciate the risks of buying land without registration. Most provinces at the time of the Uniform Act did not have electronic land registration, and Ontario's system was tightly controlled as to access and technology. Thus whatever people might come up with to transfer land would probably not be registrable in any event. The Uniform Law Conference's decision to exclude these land transfers reflected the same decision made in then-recent statutes in Australia (see for example the regulations under the Electronic Transactions Act, 2000 of New South Wales) and Singapore (see s. 4 and Schedule 1 of the Electronic Transactions Act.)
As noted in my last column here, the Uniform Act also excluded negotiable instruments, for other reasons.
Recently a number of people have been asking whether the real estate exclusion is still needed, if it ever was. Should the Uniform Act and its provincial enactments be amended to remove that exception, so the legislation would apply to real estate transfers? I will tell you now that I am not going to answer that question; I want to hear your answer. Here are some of the considerations that appear to me to be relevant to the question.
First, we need to appreciate the limited scope of the 'exception'. The Uniform Act says that where the law requires writing or an original, the requirement may be satisfied by an electronic document of certain characteristics. A signature requirement may always be met by an electronic signature. Thus if the law does not require any of these forms, the legal effect of electronic communications does not rely on the legislation based on the Uniform Act.
Our law rarely requires writing or signatures. As a matter of business prudence, people do tend to 'get it in writing,' and signatures are widely used for authentication and for the ceremonial purpose of making people realize they are doing something with serious consequences. Just as business prudence leads people to do this, business prudence can govern whether and how they do it electronically.
The main law that requires writing in real estate transactions is the Statute of Frauds. It says that an interest in land needs to be made or created in writing signed by the parties. That statute was certainly present in the minds of the drafters of the Uniform Act. (I chaired the working group of the Uniform Law Conference that prepared it.) The Statute of Frauds applies to the creation of the interest in land, but not to the negotiation that leads to that creation. None of the surrounding documents and correspondence needs to be in writing.
The second consideration deals with the nature of 'writing'. When the Model Law and the Uniform Act were drafted, it was at least an open question whether electronic communications could be considered to be 'writing' for legal purposes. Both documents were created on the assumption that 'writing' meant 'on paper' (or some other tangible medium), and an electronic communication was not in writing. Given the uncertainty on that point, it made sense to remove the doubt by spelling things out.
Since that time, however, the world has become much more familiar with electronic communications. Courts in several common law countries have held that electronic communications satisfy the Statute of Frauds writing and signature requirements without any statutory help. The Alberta Court of Queen's Bench in Leoppky v Meston2008 ABQB 45 found a series of emails capable of constituting an enforceable transfer of a house (though on the evidence, intention to convey was not present). The Court did not mention Alberta's Electronic Transactions Act, which excludes land transfers in any event (section 7(e)).
The High Court of Singapore decided in SMI Integrated Transware v Schenker Singapore  SGHC 58,  2 S.L.R. 651 (P.C.) that email headers could constitute signatures so as to satisfy Singapore's Statute of Frauds, despite the exclusion of land transfers (including a lease of the kind in issue) from the Electronic Transactions Act.
Earlier this year, the Commercial Court of the Queen's Bench Division of the English and Welsh High Court found a guarantee constituted by a chain of emails presumptively enforceable under the English Statute of Frauds. Golden Ocean Group v Salgaocar Mining Industries  EWHC 56 (Comm). The parties agreed that an email signature would satisfy the statute (para. 95).
The third consideration is that not all Canadian jurisdictions have excluded real estate transfers. New Brunswick did not put any exclusions into its Electronic Transactions Act. Quebec's legal framework statute does not mention immovable property. The operation of the law on this point in those provinces has not created problems, to my knowledge. The American equivalent to the Uniform Act, the Uniform Electronic Transactions Act, did not exclude land transfers. It left the question of registrability to the recorders of land transactions.
For that matter, Manitoba has never proclaimed in force the part of The Electronic Commerce and Information Act authorizing electronic equivalents of writing and signature. So all electronic transactions, not just ones involving real estate, have to find their legal support outside the enabling statute, without noticeable harm to business in that province.
UNCITRAL revisited the question of the legal effect of e-communications in the Electronic Communications Convention in 2005. Confidence in the use of such communications, and in UNCITRAL's 'solution' for removing barriers to them, had grown to the extent that the Convention makes binding on member states what the Model Law had simply put out for adoption or adaptation. The Convention spells out the exceptions, too, as the Model Law had not done. No exception was given, or suggested in the Working Group's discussions leading up to the Convention, for transactions involving land.
The Uniform Act and its enactments say that it yields to any other law that authorizes, prohibits or regulates electronic communications (section 2(5)). The purpose of this provision was to avoid conflict between the generic permission of the UECA and any existing laws that already created a statutory regime for e-documents or e-filing. The provision clears the way for electronic registration statutes, and ensures that even a general permission to satisfy writing and signature requirements of land transfers would stop short of making an e-transfer registrable.
For example, Ontario's Land Registration Reform Act, 1994 provides for e-registration of land transfers by special instruction from an authorized user of the system (generally a lawyer for one of the parties) but not for the registration of the transfer documents. Those transfer documents should be legally enforceable in any event, however, if only to justify the lawyer's instructions to the land titles registry. Thus the e-commerce legislation might still be usefully invoked for the transfer (if it were not excluded), even though the registration is separately dealt with. (One may compare Ontario's system with that in force in British Columbia, about to become mandatory. As in Ontario, B.C.'s Electronic Transactions Act excludes land transfers from its general enabling rules.)
(Most of Part 2 of PIPEDA applies only to statutes and regulations specially designated under the Act. It is interesting that the only federal legislation to which it applies, eleven years after it came into force, is the Federal Real Property and Federal Immovables Act. There may be some real demand for electronic land transfers.)
The Uniform Act was clear in its policy that excluding land transfers was not a statement that these transfers should never be done electronically, but only that additional security might be needed. "They seem to require more detailed rules, or more safeguards for their users, than can be established by a general purpose statute like this one." See the annotation to s. 2 of the Uniform Act.
The practice seems to have evolved since then. Real estate documents are frequently exchanged by fax, and closings done on the basis of faxed documents. Yet faxes are essentially electronic documents, and a faxed signature is no more reliable than a digitized signature that reproduces the handwriting by electronic means. Banks are known to close mortgage financing on the basis of documents in Portable Document Format (PDF), often with signed paper documents to follow – but the money changes hands on the strength of the electronic versions (and no doubt on the presence of considerable other legally enforceable security).
Most land transfers are not done by people all on their own. If they do not have lawyers, they generally rely on at least one and often two real estate agents, who are licensed professionals entirely capable of watching out for basic questions of security, and who of course know about the need for registration of interests being created. The risk of fraud, say by the creation of multiple inconsistent transfer agreements, is arguably no higher for electronic than for paper documents. (The various incidents of mortgage fraud in recent years have not depended on electronic documents in particular.)
In the light of these considerations of law, policy and practice, is the exclusion of real estate transfers from the Uniform Act and its provincial enactments still justified? Given the case law, one might think that the Act could simply be ignored; the Statute of Frauds seems to be comfortable with e-communications - though only one Canadian trial-level court has so held, so far as I know. However, the exclusion is still a message, not a prohibition but a warning, a special status. Is it time for that to change?
The column, first published on the collaborative legal publishing site Slaw, is reproduced here with permission.
John D. Gregory works in civil justice law reform at the Ministry of the Attorney General. The views expressed are not necessarily those of the Ministry.
Default interest rates: Section 8 of the Interest Act
By Silvana D’Alimonte and Beth Earon
Section 8 of the Interest Act (Canada) prevents a lender from charging a higher rate of interest following a default on a mortgage of real property than that charged during the term of the mortgage. For example, a mortgage that provides for a rate of interest of 5% during its term that is increased to 10% should the borrower fail to pay the amount due at maturity or should the borrower go into default will contravene section 8 of the Act. This section is not limited to interest, but rather it includes fines, lump-sum bonuses and increased rates of compounding interest where the effect is an increased cost of a mortgage loan on default.
Treatment by Canadian courts
The interpretation of section 8 of the Actin Canadian jurisprudence has been inconsistent and of little assistance in setting out general principles. Indeed, as one British Columbia Court of Appeal judge put it in Reliant Capital Ltd. v. Silverdale Development Corp. (Reliant): “about the only thing on which the courts seem to agree is the difficulty of construing the language of section 8 in the context of the modern commercial world." In Ontario, case law has tended to focus on the substance and effect rather than the semantics of the provision, looking to whether the outcome was a differential rate of interest on arrears over that of principal not in arrears. Therefore, a mortgage agreement entitling the borrower to an interest rebate that effectively rendered the loan interest-free until the maturity date was held to violate section 8 of the Act, as were mortgage agreements permitting increased interest rates on maturity or following default.
In Western Canada, on the other hand, there has been significant appreciation by the courts for the contractual freedom of the parties, with courts looking to whether a borrower requires protection from penal loan provisions or whether a provision that appears on its face to violate section 8 can be saved by virtue of serving a “legitimate commercial purpose.” In Alberta, the consideration of whether there is a bona fide business reason for the increase in the interest rate has been held to retain the intent of the legislation while allowing lenders to address the contemporary realities of their business.
The Court of Appeal in Reliant, however, rejected the legitimate commercial purpose test followed in Alberta, on the basis that such a test gives rise to commercial uncertainty and leads to arbitrary application. Instead, the court adopted a strict or narrow interpretation of section 8 of the Act and stated that “the circumstances in which the contract was made must be viewed objectively and the intention of the parties must be determined, as far as may be possible and necessary, from the language used by the parties in their agreement, viewed against objective circumstances in which the agreement was made.” In that case, a higher rate of interest applicable one month prior to maturity of the mortgage was construed as compensation for the higher risk of default at a date later in the term of the loan and therefore found not to offend section 8.
Although the commercial purpose test is no longer applicable in B.C., nevertheless, the Court of Appeal in Reliant continued to emphasize that section 8 exists to “protect property owners against abusive lending practices, while recognizing that generally speaking parties are entitled to freedom of contract.” On the whole, however, Reliant, along with much of the judicial consideration of section 8, reinforces the conclusion that each case must be assessed on its individual facts.
Application in a commercial reality
A prudent lender in structuring a mortgage agreement whereby a default rate of interest is necessary or desirable should ensure that the increased rate is not triggered by a default or a maturity date in order to avoid conflict with the scope of section 8 of the Act. Rather, an increased rate of interest prior to default or maturity will likely be acceptable if the lender is able to demonstrate that the increased rate is caused by some other event, such as a construction schedule date or the attainment of a financial ratio.
Another manner in which a lender can avoid a potential contravention of section 8 of the Act, in particular foreign lenders who are accustomed to extracting default rates of interest in jurisdictions that permit such rates, is to stipulate a default rate of interest in the loan agreement, to the maximum extent permitted by law, thereby rendering the increased interest rate severable in the event it is found unenforceable. For greater certainty, the mortgage that secures the loan should expressly provide that it does not secure the obligation to pay the higher rate of interest on default. In this way, to the extent that a lender has also obtained personal property security, a lender may be able to recoup its default rate of interest from the sale of personal property.
Silvana D’Alimonte and Beth Earon practise at Blakes LLP in Toronto.
Mortgage/security interests in "fixtures"
By Edward D. Brown
It is generally understood that where a lender takes a security interest in present and after-acquired goods which are, or which may in the future become, affixed to real estate, and the goods are not what are defined as "building materials" in Section 1 of the Personal Property Security Act (PPSA), to establish and protect the lender's priority in such affixed goods, the lender should both register a financing statement (describing the affected collateral) in the Personal Property Registry and additionally file a PPSA (Fixtures) Notice against the title to the relevant realty. This is a prudent practice, and I believe the norm, for situations where lenders are taking both a real property mortgage and a personal property security agreement from the debtor.
The rational for registering both a financing statement in the Personal Property Registry and a fixtures notice against the title to the relevant realty was explained in the Law Society of Manitoba publication Highlights of the New Personal Property Security Act, published October 26, 1999. The publication states that, “There are special filing and priority rules regarding fixtures that will be covered later in this paper. Those provisions act to reverse the common law rule that goods affixed to land become real property and are governed by real property laws.” The paper goes on to state that, “Due to the fixtures priority rules in the PPSA possibly dealing with claims of mortgagees of the land, there is a potential problem due to the PPSA priority not meshing with the priority rules under other legislation affecting competing land claims.” The footnote for that statement references the Real Property Act and the Mortgage Act of Manitoba. A review of the following provisions of the MPPSA supports this position:
- Section 1 which contains definitions of "fixture", "goods", "personal property", "collateral" and "security interests";
- Section 3(1)(a) which spells out what the PPSA applies to;
- Section 36 which mandates that a secured creditor should register a PPSA (Fixtures) Notice to establish and maintain the creditor's priority with respect to fixtures; and
- Section 69(2), which, in effect, provides that where there is a conflict between the PPSA and any other provincial legislation (other than consumer protection type legislation), the conflict is to be resolved in favour of the PPSA.
In other words, by virtue of Manitoba having codified the law as it relates to the perfection of security interests in fixtures, one can no longer rely upon the common law rule that registration of a real property mortgage automatically attaches to goods that are, or in the future may become, fixtures.
For the reasons outlined above, where the lender is taking only a personal property security agreement which extends or could extend to fixtures, the lender should also register both a financing statement in the Personal Property Registry and a PPSA (Fixtures) Notice against the relevant realty. But what about the situation where the lender takes only a real property mortgage and not a personal property security agreement? On the basis of the general (or "common" law), one would reasonably expect that the mortgage, unless by its terms it expressly excluded affixed goods, would "automatically" include goods which are (or in the future become) fixtures. Following this line of reasoning, one would expect that upon due registration of the mortgage, it should not be necessary to do any further registrations. However it is this writer's view that counsel should in fact go further and file both a financing statement in the Personal Property Registry (which describes the present and after-acquired goods affixed/to be affixed to the subject realty), plus, based on such Personal Property Registry registration, additionally register a PPSA (Fixtures) Notice against the title(s) to the subject realty.
Frankly, this situation calls out for reform, and it would behoove the provincial government to amend one or both of the PPSA and the Real Property Act to make it clear that due registration of a real property mortgage which does not specifically exclude present and/or after-acquired goods affixed/to be affixed to the mortgaged realty, should be sufficient to establish and maintain the mortgagee's security priority in fixtures. As to what that priority should be, the writer believes that once a real property mortgage has been duly registered, that should establish (subject to Section 17 of the Manitoba Mortgage Act), the mortgagee's priority for the mortgage's charge against both the real estate other than fixtures and for fixtures. That priority should apply to goods which were already affixed to the realty when the mortgage was registered. As to goods which become affixed after the mortgage has been registered, the mortgage should also have priority over same, subject however to "super priority" rights which should be given to purchase money financiers.
Edward D. Brown is a partner at Pitblado LLP in Winnipeg. He is indebted to his legal colleagues Wells Peever, Q.C. and to Professor Arthur Braid, Q.C. for their invaluable input into this paper.
Edward D. Brown
Published by the Canadian Bar Association's National Real Property Law Section.
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The views expressed in the articles contained herein are solely the views of the authors, and do not necessarily represent the views of the Canadian Bar Association.
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