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Thursday, February 16, 2017

Divisional Court comments on positive covenants

Property owners may covenant with one another in connection with their lands.  They may agree to negative covenants, which prevent certain things from being done on or with the land. For example, a negative covenant may prohibit certain uses that can be made of land or require that only certain types of building materials or colours can be used in buildings, etc.  Owners may also agree to positive covenants, which are promises to do something.  For example, a positive covenant may require one neighbour owner to pay something toward the costs of maintaining shared facilities or actually to carry out the maintenance activities, etc. 

The distinction between negative and positive covenants is important because, in Ontario and traditionally at Common Law, positive covenants do not generally run with the land.  That is, although a covenant may somehow be registered on title to a property (in a deed or easement, etc.), it does not necessarily follow the land when ownership changes.  Negative covenants will bind future owners, but positive covenants will not normally bind future owners.  Positive covenants are treated as agreements between the individual owners that attach to the owners, rather than to the land.

However, there are exceptions to the general rule.  In a 2016 appeal from a Small Claims Court decision, the Ontario Divisional Court reviewed the law on positive covenants and the exceptions to the general rule that positive covenants do not run with the land.  Statutory exceptions to the rule include: positive covenants granted by public authorities (Planning Act, R.S.O. 1990, c. P.13); positive covenants concerning condominiums (Condominium Act, 1998, S.O. 1998, c. 19); and positive covenants between the Crown and private landowners concerning the installation of survey monuments (Surveys Act, R.S.O. 1990, c. S.30, s. 61(1)).

There are also Common Law (non-statutory) exceptions to the general rule, including chain of covenants, the doctrine of benefit and burden, and conditional grants.  

The chain of covenants exception applies when successors-in-title (the future owners) agree to the same positive covenants.  That is, each time a property subject to the original positive covenant is transferred, the new owner(s) would agree to be bound by the covenant.  In reality, this is arguably the creation of a new covenant at the time of each transfer rather than a true exception to the rule.

In the 2016 appeal case, the Divisional Court described the other two Common Law exceptions as follows:

  •  Conditional Grant Exemption. When being asked to enforce a positive obligation, the courts will first look at the transaction between the parties to see if a benefit was clearly made on the conditional acceptance of a positive obligation. If such an intention can be made out on the face of the transaction, the conditional grants exception is engaged
  •  Benefit and Burden Exemption: If a conditional connection between the obligation and the benefit is not clear, the courts will then consider whether the benefit and burden exception applies. By looking at the circumstances of the transaction, the intentions and relationship of the parties, and the nature of the benefits and burdens at issue, the courts will determine if there is an implicit and necessary connection between formally separate obligations and advantages. Or, to repeat the words of Professor Ziff, this second exception looks to whether the courts should “tether previously separate promises”.

Both of those exceptions happen in circumstances where the Court determines that a future property owner should not escape the obligations of a previously-made positive covenant (on account of the positive covenant not running with the land) where that property owner is receiving a benefit connected with the covenant.  The Divisional Court summarized: "In a fulsome, pragmatic approach, as confirmed in Wilkinson, the courts must look to the substance of the relationship between the benefit and the burden to determine if the positive covenant continues to apply. As noted by Vice-Chancellor Megarry in Tito, when there is a sufficient degree of correlation between the obligation to pay and the grant of benefits, the burden and benefits exception applies."

Read the Divisional Court's decision at: Black v Owen.