Idle-O

By Jeremy Burgess
Categories: Blog, Real Estate

This post discusses the hundreds, if not thousands, of land contracts in British Columbia that may be negatively affected by section 73 of the Land Title Act, R.S.B.C. 1996, c. 250 and the line of legal authorities stemming from International Paper Industries Ltd. v. Top Line Industries Inc., 1996 CanLII 3340 (BC CA) ("Top Line").

S. 73 of the Land Title Act and its statutory ancestors are aimed at preventing land owners from effectively subdividing their land by: (a) purporting to transfer portions of a property; or (b) granting leases for terms of more than 3 years for a portion of a property. S. 73 prevents the registration of any contracts which offend that section.

Prior to Top Line, it was the widely held belief that the effect of s. 73 was limited to third-parties being unaffected by offending contracts because such contracts could not be registered. Shockingly Top Line went much further and determined that an offending contract under s. 73 was void from the moment it was signed (void ab initio). This likely sent ripples of panic through the industry as many land owners and lessees, on the reasonable (at the time) advice of professionals, had established property agreements and leases which were rendered unenforceable.

To understand the unexpected impact of Top Line, one only needs to look at the facts in the case itself. Top Line arose as a result of a tenant, International Paper Industries Ltd., attempting to renew its soon to expire lease with its landlord, Top Line Industries Inc. Despite two previous legal battles about the lease where the court granted judgment in favour of International Paper on the basis of the lease, Top Line took the position that it had no contractual obligation to renew the lease since s. 73 of the Land Title Act, R.S.B.C. 1979, c. 219 rendered the lease void.

In fact, in the BC Supreme Court, the court once again sided with International Paper, but the lessee found itself shocked when the Court of Appeal wholly disagreed. The Court of Appeal found that s. 73 served an important public interests in allowing municipalities to control the subdivision of land. The Court of Appeal very reluctantly held that the lease itself was not legal because of s. 73 of the Land Title Act. Since the lease was not legal, the court found that neither party had any right to seek legal relief on the basis of the lease.

The Legislature saw fit to step in to try to relieve some of the panic created by Top Line and added s. 73.1 to the Land Title Act, R.S.B.C. 1996, c. 250 on May 31, 2007. S. 73.1 essentially states that contracts which offend s. 73 are still enforceable as between the parties to it. However, the story doesn’t stop there.

At the same time s. 73.1 was brought into force, a case called Idle-O Apartments Inc. v. Charlyn Investments Ltd., 2008 BCSC 849 (CanLII) ("Idle-O #1") was working its way through the courts. The lessee in Idle-O #1, being faced with having no rights under its lease because of Top Line, decided to argue that s. 73.1 applied retroactively and saved the lease. It was notable that in Idle-O #1 , the parties had assumed the lease to be valid for and that it appeared that s. 73.1 was, by all accounts, aimed at relieving the hardship wrought by Top Line. The Supreme Court agreed and held that s. 73.1 was retroactive in effect, thereby saving the lease from being unenforceable.

However, the Court of Appeal once again turned over the lower court in 2010 BCCA 460 (CanLII) (Idle-O #2). The Court of Appeal that s. 73.1 of the Land Title Act is not retroactive and any leases entered into prior to its coming into force which contravened s. 73 of the Land Title Act were illegal and enforceable. In other words, the potentially hundreds, if not thousands, of instruments which offend s. 73 of the Land Title Act which were entered before May 31, 2007 remain void and legally unenforceable.

This brings us to the most recent developments in this area of law. Although the lease in Idle-O #2 was held to be illegal, the Court of Appeal sent many of the alternative claims of the lessee back for determination by the Supreme Court. These claims included:

1.  a Declaration that the tenant was entitled to an irrevocable licence to the leased property pursuant to the terms of its lease;

2.  in the alternative, a Declaration that the landlord held the leased property pursuant to a constructive trust in favour of the tenant, and an Order granting the tenant an undivided interest in the leased lands equal to the value of the leased property as against the lands;

3.  in the further alternative, damages for the loss of the lease; and

4.  in the further alternative, damages for unjust enrichment and an Order referring the assessment of those damages to a Registrar of the Honourable Court.

Later, specific performance was added as a claim.

The alternative claims were essentially based on the argument that the lessee was entitled to a remedy in contract or equity and should remain in possession of the land or receive damages as a result. Further, that to decide otherwise would be to award an undeserved windfall to the landlord and that a grave injustice would result.

The Supreme Court recently released its decision on the alternative claims in 2013 BCSC 2158 (CanLII) (Idle-O #3). The court founded its decision on proprietary estoppel: determining that it would be unconscionable to allow the landlord to rely on its legal rights (the lease being void) where the tenant would suffer so much as a result. The court then essentially stepped in and required the landlord to resign the lease with the tenant so that it could receive the benefit of s. 73.1. This was based, at least in part, on clauses in the lease requiring the parties to do everything reasonable to effect the terms of the lease.

At the time of writing, the Supreme Court’s decision is under appeal and cross-appeal without a date set for its hearing. Idle-O #3 is lengthy, confusing and raises some serious questions with respect to procedure and several legal principals. As such, the appeal is expected to grapple with some of the questions left open which include, for example:

•  what will future courts do if there isn’t a clause in a contract requiring the parties to take all reasonable steps to perfect the contract;

•  whether quantum meruit (value given for value received) will form the basis for future decisions; and

•  how to deal with lessees who chose to abandon a contract on the basis of its illegality, but nonetheless seek compensation for their losses.

The above-cases illustrate the importance of retaining counsel well-versed on the evolution of the law so that your risks can be minimized.

Author: Jeremy Burgess p: 250.869.1156 e: burgess@pushormitchell.com