Seeking a Great-Great-Great Windfall

AS PREVIOUSLY PUBLISHED IN THE RURAL VOICE:  

Until recently, there was a thin strip of laneway running behind a building not far from Downtown Toronto that still belonged – at least on paper – to the man who bought it 1824.  Although that owner died in 1870, he was still considered by the Land Registry in Ontario to be the registered owner of the strip, which is wide enough only for a car (or horse and cart) to pass along.  On an application made to the Superior Court, the present-day corporate owner of the adjacent property has now been declared the owner of the strip of laneway on the basis of adverse possession.

By operation of Sections 4 and 15 of the Real Property Limitation Act, a person who has been in legal possession of another’s land for a period of ten years while the land has been registered under the Registry Act – adverse possession – can obtain possessory title to the land; the ownership interest of the registered titleholder will be extinguished.  The claimant for possessory title must meet three requirements: 1) the claimant (or his or her predecessors-in-title) must have had actual possession of the land being claimed, which means “open, notorious, peaceful, adverse, exclusive, actual, and continuous having regard to the nature of the disputed property”; 2) the claimant must have had the intention to exclude the registered owner and other persons entitled to possession of the disputed land (an “animus possidendi”); and, 3) the registered owner and any other persons entitled to possession must have been excluded for the 10-year statutory period.  Where the three requirements are met, the claimant can seek a declaration from the Court that the claimant is the true owner of the disputed lands and an order requiring that the Land Register be amended to reflect that ownership (i.e. making the claimant the “new” registered owner).

The claim for possessory title to the lands in this case was fairly straightforward – the Judge even said it was “not a close call”.  The Applicant, the current corporate owner of the adjacent property, had purchased its land from a family who had held the land continuously since 1941.  The son of the 1941 purchaser gave uncontested evidence in support of the application that his family had always believed that they owned the thin strip of laneway at the back of their property.  They didn’t know that it was not part of their property.  The 1941 purchaser ran a business and parked his car on the laneway every day.  When he passed away, his son continued to park there.  No one ever objected to that use or challenged the family’s control of the laneway.  In fact, in the early 1970s, the family erected a chain across the entrance to the laneway to prevent any access to it without their permission.

What was noteworthy about this case, though, was the involvement of the great-great-great grandchildren of the 1824 purchaser.  The Applicant had hired a genealogist to identify and locate the descendants of the registered owner of the laneway so that they could be given notice of the proceeding.  Notice of the application was given so that anyone with rights of ownership in the property could assert their claim to the lands in opposition to the Applicant.  However, as observed by the Judge: “some of the respondents seem to have misunderstood the purpose of the notice they received.  They oppose the application as if they, as a group, have some residual right to share the property (or its monetary value).  They do not have any such rights.”

None of the great-great-great grandchildren of the 1824 purchaser provided evidence to show that any of them had a right to the land in issue.  The fact that the respondents could “trace roots to an owner 200 years ago” did not mean they owned the land.  While the last will and testament of their ancestor was known, the possible history of the ownership of the land after that is unknown: “… no one knows the identity of any residual beneficiaries of [the owner’s] children, let alone his grandchild, great-grandchildren etc.  Gifts could have been made to charity or to relatives by marriage, or to anyone.”

Ownership now of the laneway strip for the great-great-great grandchildren would have been a windfall – there was no evidence that any of them knew anything about the laneway before being given notice of the court application.  However, taking a run at that windfall came with a cost.  The Applicant incurred costs of more than $112,000; it sought indemnity for about $25,000 from those respondents who opposed the application.  In response to the costs claim by the applicant, the respondents pleaded that any costs they are ordered to pay should be reduced because they were self-represented litigants: “Individuals cannot afford the legal costs that a large corporation can afford.  Yet we feel we should be able to present our case at a Hearing without having to risk a huge (huge for us) legal bill.  For access to justice to be fair, we think it is reasonable that the costs award to the applicant be substantially reduced from the amount requested.”

The Judge didn’t go for that argument, awarding the $25,000 requested by the Applicant.  The Judge concluded: “Like all civil litigation, this case was about money.  The opposing respondents wanted the developer to pay them for great-great-great grandfather’s laneway.  … The opposing respondents felt a heavy responsibility to make a ‘large corporation’ building a ‘high rise development’ pay them money.  They chose to see a refusal as an affront.”

Read the decision at: 2022 ONSC 6776 (CanLII).

Rights of First Refusal – give them the attention they deserve

AS PREVIOUSLY PUBLISHED IN THE RURAL VOICE:  

In the real estate world, a Right of First Refusal (“ROFR”) creates an opportunity for the holder of the right to match an offer made to purchase a property – it’s a “sort of” option to purchase that will arise in the future under certain circumstances.  In the most common scenario, the owner of the property has an obligation to offer the property for sale to the holder of the ROFR when the owner receives a bona fide third-party offer to purchase and intends to accept the offer.  The holder of the ROFR can then choose to match the terms of the third-party offer and purchase the property.  If the holder of the ROFR doesn’t choose to match, the ROFR will in most cases be exhausted.

A ROFR is commonly created through agreement between the owner of a property and the person to whom the right is granted.  Often the ROFR will be given back to a vendor in a property transaction.  The vendor sells the property to the purchaser, but the purchaser agrees that the vendor will have a ROFR to re-purchase the property if the purchaser decides to sell.  This ROFR is not a true option to re-purchase that can be exercised by the vendor at its discretion.  Instead, the purchaser (the new owner of the property) must first decide to sell the property, which gives rise to the obligation to offer it for sale to the vendor (the previous owner of the property).

Sometimes the ROFR will be granted in a detailed and lengthy stand-alone agreement prepared by the parties’ lawyers.  Probably more often than not, though, the ROFR is an afterthought thrown into the schedule of additional terms attached to an Agreement of Purchase and Sale.  Does a statement as simple as “Vendor will have the first right of refusal to purchase the property from the Purchaser” create an enforceable ROFR?  Maybe. Maybe not.  A judge being asked to enforce the ROFR would need to “read into” the agreement one or more implied terms: that the Purchaser must present the Vendor with any offer the Purchaser is prepared to accept and that the Vendor would then have an opportunity to match the offer, the Vendor’s right to be exercised, as stated by the Court of Appeal for Ontario in one decision, “in a reasonable time given the circumstances that exist when the offer is made.”

The enforceability of the ROFR is of most importance to the party who is granted the right, so that party would be well-advised to take the time to craft an agreement that won’t depend on the Court’s willingness to infer the existence of unwritten terms.  At a minimum, the ROFR should spell out that when the property owner receives an offer to purchase the property that the owner is prepared to accept the owner must notify the ROFR holder of the offer and its terms.  And the ROFR should provide clear direction to the ROFR holder on how to exercise the right and within what period of time the right must be exercised.  The ROFR holder may also want impose conditions on the terms of third party offers that may be considered by the property owner so that the owner doesn’t use unreasonable terms such as excessively high deposit amounts or very short closing dates to render the ROFR impossible for the right holder to exercise.

This should probably go without saying, but an agreement for a ROFR should always be made in writing.  In Ontario, legislation called the Statute of Frauds, R.S.O. 1990, c. S-19 provides the following:

No action shall be brought to charge any executor or administrator upon any special promise to answer damages out of the executor’s or administrator’s own estate, or to charge any person upon any special promise to answer for the debt, default or miscarriage of any other person, or to charge any person upon any contract or sale of lands, tenements or hereditaments, or any interest in or concerning them, unless the agreement upon which the action is brought, or some memorandum or note thereof is in writing and signed by the party to be charged therewith or some person thereunto lawfully authorized by the party.

Generally speaking, contracts for the sale of land must be in writing to be enforceable.  One exception to that rule is the equitable doctrine of part performance.  If it can be shown that an oral contract was made and that part of the contract was performed by the parties, then the Court may find the contract is enforceable in spite of the Statute of Frauds.  As stated in the decision of the Court of Appeal in Erie Sand & Gravel Ltd. v. Seres’ Farms Ltd.:

The purpose of s. 4 of the Statute of Frauds is to prevent fraudulent dealings in land based on perjured evidence. However, Equity will not allow the Statute of Frauds to be used as an "engine of fraud". It created the doctrine of part performance to prevent the Statute of Frauds from being used as a variant of the unconscionable dealing which it was designed to remedy: see Hill v. Nova Scotia (Attorney General) [1997] 1 S.C.R. 69, at para. 10. The requirements in s. 4 of the Statute of Frauds must give way in the face of part performance because the acts of part performance fulfill the very purpose of the written document - that is, they diminish the opportunity for fraudulent dealings with land based on perjured evidence.

In the ROFR scenario, if the party seeking to enforce an oral ROFR has performed some act under the agreement in reliance on the existence of the ROFR (such as the provision of services), the Court may support the ROFR.  However, nothing should be taken for granted.  If you want a ROFR, do it right.

Buyer (and Seller) Beware! HST on the Sale of Land

AS PREVIOUSLY PUBLISHED IN THE RURAL VOICE:  

The HST is a potential landmine for real estate solicitors and, consequently, their clients.  In Ontario, the 13% surcharge for the Harmonized Sales Tax applies to all real estate transactions unless the transaction is exempt.  The default position in the Excise Tax Act is that HST will be added to the cost of a transaction and lawyers and their clients should assume that to be the case unless they can show definitively that an exemption applies – that the transaction is an “exempt supply” within the meaning of the Act.

On a real estate transaction, collection of HST and remittance of the tax to the CRA is normally the responsibility of the vendor.  Where HST is payable, CRA will deem HST to have been collected by the vendor.  That’s the landmine: even if the vendor didn’t collect HST, the vendor is deemed to have collected it and must immediately pay the amount owing to CRA.  Therefore, the question of whether HST is “included in” the purchase price or is “in addition to” the purchase price in a deal between vendor and purchaser can be vitally important.  In some cases, a vendor may agree that HST is “included in” the purchase price based on an understanding that no HST is payable.  If it turns out that HST is payable, then the vendor’s anticipated recovery on the sale could come up 13% short.

While there are a number of HST exemptions that can apply to the sale of farmland such as sales by an individual to a related person and sales by a partnership, trust or corporation to a partner, beneficiary, shareholder or related person, situations do arise where HST is payable.  In a case recently decided by the Superior Court of Justice, a vendor and purchasers sued and counter-sued each other over the way HST was handled in the sale of a mixed-use property after CRA reassessed the HST amount after the transaction closed. 

The vendor agreed to sell the purchasers a 14.7-acre property containing a house and equestrian centre.  The purchase price was $1.285 million.  The parties used the standard Ontario Real Estate Association (“OREA”) Form 100 Agreement of Purchase and Sale and agreed that if HST was payable on the transaction, it would be “included in” the purchase price.  As none of the parties to the transaction was an HST registrant, the vendor was responsible to collect and remit any HST payable.  The residential portion of the property was not subject to HST, being exempt as used residential property.  The commercial/agricultural portion of the property was subject to HST.  The vendor and purchasers agreed that 30% of the property would be considered subject to HST, meaning $45,500 would need to be remitted to CRA.  The net purchase price would therefore be $1,239,500.  After closing, the vendor remitted the HST to CRA and received a Notice of Assessment showing no balance owing.

Before closing, the purchasers’ lawyer had communicated to the vendor that the purchasers intended to use the property for residential purposes.  However, the purchasers did not move into the property after closing and instead leased the equestrian part of the property to a commercial tenant and the residential part of the property to a residential tenant.  One of the purchasers then applied to CRA to be registered for HST and also requested input tax credits for the HST paid on the purchase of the property.  She mistakenly asked for credits based on HST being payable for the whole purchase price (i.e. the entire property) rather than just the non-residential portion.

CRA then looked into the situation and reassessed the HST payable on the original sale transaction.  CRA disagreed with the allocation of the purchase price as between the exempt residential portion and the non-exempt commercial/agricultural portion, finding that the commercial/agricultural portion represented 78% of the sale price.  The HST payable for the taxable portion of the property was $130,466.88 rather than the $45,500 that had been remitted by the vendor to CRA.

Where a purchaser is registered for HST, the vendor is not required to collect HST generated by the sale of farmland.  The purchaser reports the HST payable and claims an offsetting input tax credit in the purchaser’s first HST return after the sale, which is what the purchaser in this recent case did.  The problem from the vendor’s point of view was that, had she known that the purchaser would be an HST registrant (which is not what was understood at the time the transaction closed), she would not have had to collect HST and would have kept the full purchase price without the $45,500 deduction.  The vendor sued the purchaser to recover that amount.

The vendor later discontinued her claim because CRA refunded the $45,500 to the vendor on the basis that the purchaser (one of the two joint purchasers) was now registered for HST.  However, the purchasers continued their counterclaim against the vendor arguing that they had suffered the loss of the $45,500 price adjustment on the sale; effectively, the purchasers contended that they had only agreed to pay the vendor $1,239,500 for the property plus any HST payable.  If no HST was payable, then the vendor should refund them $45,500. 

The Superior Court dismissed the counterclaim, finding that the purchasers suffered no loss.  The purchasers agreed to pay $1.285 million for the property and only paid that amount.  The purchaser who was registered for HST received input tax credits for the full amount of any HST that had been paid and suffered no financial loss.  

Read the decision at: 2022 ONCS 919.