Withholding consent to assignments: a primer
The issue of when a landlord can refuse to consent to the assignment of a lease remains a notable source of litigation in the commercial real estate space. While lease agreements typically contain provisions permitting the tenant to assign upon securing the landlord’s consent (such consent not being unreasonably withheld), parties tend to arrive at significantly different interpretations of such clauses when faced with a dispute. The purpose of this article is to provide an overview of the law in this area in an effort to help landlords and tenants better position themselves when considering the assignment of commercial leases.
In 2002, the Court of Appeal for Ontario offered a salient summary of the law of assignments in Rodaro v. Royal Bank (2002), 59 O.R. (3d) 74. Writing for the Court, Doherty J.A. stated:
"Aside from limitations imposed by statute, public policy or the terms of a specific contract, a party to an agreement may assign its rights, but not its obligations under that agreement, to a third party without the consent of the other party to the contract. A party will not, however, be allowed to assign its rights under a contract if that assignment increases the burden on the other party to the agreement, or if the agreement is based on confidences, skills or special personal characteristics such as to implicitly limit the agreement to the original parties.”
This suggests that where a lease is silent as to the issue of assignment, the tenant may generally assign its interests without obtaining the landlord’s consent unless: (a) the assignment would increase the burden on the landlord; or (b) the landlord initially elected to enter into the lease owing to the tenant’s confidences, skills or special characteristics. The issue becomes more complicated in circumstances where the parties turned their minds to the issue and included the common-place restriction in which the tenant is required to secure the landlord’s consent before an assignment can occur. This restriction is typically softened by the qualifier that the landlord may not unreasonably withhold such consent. Moreover, subsection 23(1) of the Commercial Tenancies Act provides that unless a lease contains an express provision to the contrary, it will be deemed to include a clause prohibiting the landlord’s consent from being unreasonably withheld.
Shortly after the Court of Appeal’s decision in Rodaro v. Royal Bank, the Ontario Superior Court of Justice released what is widely regarded as the leading Ontario authority on the process to be followed in determining whether a landlord has unreasonably withheld consent. In 1455202 Ontario Inc. v. Welbow Holdings Ltd., 2003 CanLII 10572, Culluti J. offered the following guidance:
- the burden is on the tenant to satisfy the court that the landlord’s refusal was unreasonable;
- in determining the reasonableness of a refusal to consent, it is the reasons given by the landlord at the time the refusal was made, and not any additional or different reasons provided subsequently to the court, that are material
- as a general rule, the landlord may reasonably withhold consent if the assignment is expected to diminish the value of its rights under it;
- a probability that the proposed assignee will default in its obligations under the lease may be a reasonable ground for withholding consent;
- the financial position of the assignee may be a relevant consideration; and
- the question of reasonableness is essentially one of fact that must be determined on the circumstances of each particular case, including the commercial realities of the market place and the economic impact of an assignment on the landlord.
As suggested by the Ontario Superior Court of Justice in the recent 2010 decision in Suncor Energy Products Inc. v. 2054889 Ontario Ltd.,  O.J. No. 5129, commercial realities play perhaps the most important role in determining whether a landlord’s consent has been unreasonably withheld. In that case, the terms of a lease of a gas station provided that the tenant could assign upon obtaining the consent of the landlord, such consent not to be unreasonably withheld. The landlord refused to consent on the mistaken belief that the assignment would erode the financial value of the leased premises. The Court, upon hearing evidence submitted by both parties, found that the landlord would in fact be much better positioned from an economic perspective if it consented to the assignment. Accordingly, the court held that the landlord was being unreasonable and concluded that the refusal was invalid.
The assignment of leases is a quintessential example of a complex legal issue disguised as a straight forward affair. Landlords and tenants should exercise care in ensuring that their intentions with respect to assignments are clearly set out at the onset of the negotiating process in order to mitigate the need for future judicial intervention.
Exercising a termination clause requires strict satisfaction of any attached conditions
The Court of Appeal for Ontario recently articulated the importance of satisfying the conditions attached to termination clauses when seeking to terminate a lease. What the trial court considered to be a largely semantic point in Dunnville Soccer Park Corp. v. Haldimand (County), 2010 ONCA 680 was ultimately found to render the landlord’s termination invalid.
The issue that gave rise to the dispute in this case concerned a long-term lease of 16 acres of playing fields. Under the terms of this lease, the Dunnville Soccer Park Corporation (“Dunnville”) and the Haldimand Youth Soccer Club, as tenants, took on the responsibility of developing soccer facilities on the premises while the Haldimand County, as landlord, was tasked with maintaining the turf. A termination clause afforded the landlord the right to terminate upon 180 days’ notice on the condition that it provided the tenants with “another reasonably similar soccer facility”.
A dispute arose between the tenants that resulted in the Haldimand Youth Soccer Club informing the landlord that it was no longer associated with Dunnville and requesting that it be removed as a party to the lease. Upon receiving this information, the landlord provided the two tenants with notice of termination and subsequently attempted to negotiate a new lease of the same premises with Dunnville on similar terms, with the notable difference that the parties would share the costs associated with turf maintenance. Reluctant to take on this new obligation, Dunnville commenced an application to determine the status of the original lease.
Advancing the position that the lease had been invalidly terminated on the basis that the landlord failed to provide it with “another reasonably similar soccer facility”, Dunnville argued that the lease remained in full force and effect. Specifically, Dunnville submitted that the landlord’s attempt to negotiate a new lease of the same premises on different terms did not satisfy the condition attached to the termination clause. The landlord, in response, maintained that its attempt to negotiate a new lease of the same premises amounted to an offer of “another reasonably similar soccer facility”.
The trial court determined that the landlord’s notice of termination was valid, holding that the landlord had satisfied its obligation to provide a replacement facility. The trial judge remarked that the proposed new lease would have provided Dunnville with the use of the same premises on “similar terms” to those in the original lease. The Court of Appeal reversed this decision, finding instead that the condition attached to the termination clause clearly required the landlord to provide the tenant with another reasonably similar soccer facility at another location, not the same facility on less favourable terms. Having failed to satisfy with this condition, the Court concluded that the landlord’s termination was invalid.
Given the Court of Appeal’s decision in this matter, landlords may wish to exercise a heightened sense of caution when considering whether to accept conditions attached to termination clauses.
Sovereign Immunity and the Challenge of Leasing to Foreign State Tenants
Leasing real property to foreign states presents a unique challenge to landlords. The operation of the doctrine of sovereign immunity, if not properly addressed in the lease instrument, can severely impact a landlord’s ability to seek recourse from the courts when faced with a problematic tenant. The aim of this article is to concisely set out the principal issues that should be considered by landlords whose portfolios include consulates, embassies or other foreign state tenants.
i. The application of sovereign immunity to lease agreements
As set out in the State Immunity Act (“SIA”), the Foreign Missions and International Organizations Act and the few cases within which these legislative instruments have been considered, the doctrine of sovereign immunity applies to leases in favour of consulates and other foreign state tenants. The 2008 Superior Court of Quebec decision in Teitelbaum v. 9093-8119 Quebec Inc. and the 1980 Ontario Supreme Court decision in Royal Bank of Canada v. Corriveau are particularly helpful in illustrating the application of sovereign immunity in this context. In both of these cases, the courts specifically remarked that the operation of a consulate or embassy is a sufficiently “governmental activity” to capitalize on the protection offered by the SIA.
ii. What if the foreign state tenant fails to plead immunity
Section 3 of the SIA establishes a presumption of sovereign immunity that operates notwithstanding a state’s failure to plead it. The onus of defeating this presumption falls on the party that is opposing the foreign state. This may be achieved by persuading the court that the opposing party should be able to rely on one of the exceptions to sovereign immunity set out in the SIA (e.g. that the foreign state is actually operating a purely commercial entity out of the premises). For greater clarity, sovereign immunity is presumed to apply notwithstanding a state's inaction unless the opposing party establishes that an exception is available or the state submits to the jurisdiction of the Canadian court.
iii. Landlord remedies in the face of sovereign immunity
Although the SIA establishes a presumption of immunity from the court's jurisdiction, it does not expressly contain prohibitions preventing private parties from exercising their contractual rights when doing so does not require the court’s intervention (e.g. re-entering and changing locks). Accordingly, landlords may have some latitude in exercising self-help remedies. While self-help does not appear to be restricted by the SIA, there is debate within the legal community as to how much protection the doctrine of sovereign immunity will afford to the foreign state tenant if the landlord elects to re-enter the premises. Some commentators have suggested that it may be possible for a tenant to rely on the provisions of the Foreign Missions and International Organizations Act as a way to restrain the landlord from exercising its right of re-entry, although this does not appear to have been litigated as a live-issue.
In addition to the potential for self-help, landlords may be able to turn to section 6 of the SIA. This provision provides an exception to the presumption of immunity in circumstances where a foreign state is a party to a proceeding that concerns “damage to or loss of property that occurs in Canada”. While the judicial definition of “property” in this context means tangible property and therefore does not extend to pure economic loss, this is an exception that landlords may be able to leverage in circumstances where it the tenant’s conduct has resulted in damage to or loss of the leased property.
iv. Voiding the application of sovereign immunity in the future
It is possible for landlords with substantial bargaining power to avoid the operation of sovereign immunity. Subsection 4(2)(a) of the SIA allows foreign states to explicitly submit to the jurisdiction of Canadian courts by written agreement. While this may be difficult for landlords to secure, the inclusion of such a clause in a lease agreement ensures that the foreign state will be subject to the same judicial reach as the typical Canadian tenant. Such a waiver may take the following form:
The Tenant hereto unconditionally and irrevocably:
agrees that the execution, delivery and performance by it of this Lease and all other agreements, contracts, documents and writings relating to this Lease shall be deemed to constitute private and commercial acts and not public or governmental acts for all purposes related to this Lease;
agrees that should any proceedings be brought against it or its assets in any jurisdiction, in relation to this Lease or any transaction contemplated by this Lease, no immunity, sovereign or otherwise, from such proceedings, executions, attachment or other legal process shall be claimed by or on behalf of itself or with respect to any of its assets;
consents generally in respect of the enforcement of any judgment against it in any proceedings in any jurisdiction to the giving of any relief or the issue of any process in connection with such proceedings including without limitation the making, enforcement or execution against or in respect of any property irrespective of its use or intended use subject to subclause 2 above.
By being aware of the doctrine of sovereign immunity from the onset of the negotiation process, landlords will be better positioned to successfully navigate the unique challenges of leasing to foreign state tenants.
Qualifying Criteria for Real Estate Investment Trusts Expected to Improve in 2011
Real estate investment trusts (“REITs”) are publicly-traded trusts that are considered attractive investment vehicles because they offer an exemption from the tax on distributions from specified investment flow-throughs. In December 2010, the federal government announced several proposed changes to the income tax rules applicable to REITs, a number of which will be of significance to the commercial real estate community.
The proposed amendments are chiefly concerned with the criteria that investment trusts must meet in order to qualify as REITs. Expected to come into force in 2011, these amendments will also be applicable on an elective basis for post-2006 taxation years if certain conditions are met. A brief overview of the most notable elements of the proposed amendments is provided below:
i. Qualified REIT Property
Under the current rules, REITs are generally prohibited from holding any “non-portfolio property”, being investments other than “qualified REIT properties”, at any time in the taxation year. Perhaps most significant of the amendments is an allowance permitting these trusts to hold up to 10% of their non-portfolio property in assets that are not qualified REIT properties without losing their status.
“Non-portfolio property” typically includes:
- property used in carrying on a business; and
- securities of an entity that represent more than 10% of the equity value of the entity or more than 50% of the equity value of the security holder.
Under the current rules, “qualified REIT property” includes:
- real or immovable property;
- property ancillary to earning of rents and capital gains from dispositions of real or immovable property; and
- some types of qualifying subsidiaries.
This welcoming allowance provides a much needed degree of flexibility and safe harbour for REITs that face unexpected or unintended property issues.
ii. Source and Nature of REIT Revenue
In order to qualify as an REIT, an investment trust must meet two tests designed to determine the nature of its revenue. The current qualification rules require that at least 95% of an REIT’s revenue be derived from passive sources and that at least 75% come from certain passive real estate sources. The proposed amendments reduce the 95% passive revenue source requirement to 90% and clarify that, for both tests, revenue is to be defined as gross revenue inclusive of capital gains.
The proposals go on to clarify that, for purposes of the two thresholds tests referred to above, amounts paid by certain subsidiaries of an REIT to the REIT will have the same character as it had when it was received or earned by the subsidiary. It is expected that this change will serve a beneficial clarification for tax planning purposes.
iii. Foreign Currency Gains
When REITs hold foreign real or immovable property, they may finance the acquisition of such property using debt denominated in a foreign currency. Given the potential foreign currency risk in holding foreign assets, REITs may choose to enter arrangements in an effort to hedge that risk. To that effect, the proposed amendments will allow REITs to earn, as qualifying revenue, gains realized from foreign currency fluctuations in respect of revenues derived from foreign real or immovable property, exposing investors to additional revenue sources.
While the final form of these proposed amendments remains to be seen, collectively they appear to improve the attractiveness of real estate investment trusts for those looking beyond securities. By providing both clarification and improved qualification thresholds, the amendments modify the rules governing REITs in a manner that better reflects the practical realities within which these investment vehicles operate.
Entitlement to Post-Closing Property Tax Refunds: 80 Mornelle Properties Inc. v. Malla Properties Ltd.
80 Mornelle Properties Inc. (the “Vendor”) was the owner of an apartment building in Toronto prior to selling it to Malla Properties Inc. (the “Purchaser”) in October 2006. Before the sale, the Vendor retained lawyers to appeal the property’s tax assessment and continued to pursue the assessment appeal well after the transaction closed. The Vendor was eventually successful in this reassessment, with the result that a tax refund of $251,166.43 was owed for the period of 2003 to 2006.
The City of Toronto paid this refund to the Purchaser in compliance with section 306(2) of the City of Toronto Act, 2006. This section provides that property tax refunds are to be paid “to the owner of the land as shown on the tax roll on the date that the adjustment is made”. Upon learning of the refund, the Vendor asked the Purchaser for the refund less the portion of it that related to the period after the sale. When this request was refused, the Vendor commenced an application to force the Purchaser to disgorge a majority of the refund.
At trial, the application judge determined that, at the time the property was sold, the most that the Vendor could be said to have in respect of its assessment appeal was a “contingent prospect for receiving a tax refund in an amount yet to be determined”. As the Vendor could not have sued on the basis of such an interest, the Court concluded that this interest did not constitute a chose in action. The application judge then considered whether the doctrine of unjust enrichment could be leveraged so as to require the Purchaser to disgorge the refund. Although the case law favoured the Vendor on this point, the Court concluded that the operation of section 306(2) of the City of Toronto Act, 2006 (requiring payment to the owner of the land as of the date that the adjustment was made) constituted a juristic reason for the Purchaser’s enrichment.
The Court of Appeal reversed this ruling. It held that the Vendor’s application should succeed on the grounds that it both overpaid taxes on the property during the period in which it was the owner and took the necessary steps to have the taxes reassessed. Ultimately, the right to receive the proceeds of the assessment appeal was a chose in action – an intangible personal right enforceable by legal action. This chose in action did not automatically run with the property when it was sold and, as the Vendor did not explicitly assign this right to the Purchaser, it retained its entitlement to the refund notwithstanding the sale.
The Court of Appeal then considered whether the City of Toronto Act, 2006 should operate as a bar to the Vendor’s application. Writing for the Court, Gillese J.A. observed that nothing in the legislation indicated that the legislature intended to interfere with the rights of property owners. Since express wording is necessary if the courts are to interpret legislation as having adversely affected a person’s rights, it could not be said that the legislature intended section 306(2) to strip the Vendor of its right to sue for the refund. Given the findings that the Vendor retained a chose in action and that the City of Toronto Act, 2006 was not a juristic reason for the enrichment, the Purchaser was ordered to disgorge the refund less the portion of it that related to the period after the sale.
The Court of Appeal’s decision is consistent with the practice on a real estate transaction. In a typical transaction the parties would have specifically dealt with this matter by an undertaking of the Purchaser to pay over to the vendor the appropriate share of any refund if and when received.
"Unreasonable" refusal to grant consent to a lease assignment
Commercial leases commonly provide that the tenant may not assign or sublet the lease without the landlord’s consent, such consent “not to be unreasonably withheld”. In Ontario, a landlord may not withhold its consent solely to secure a new advantage uncontemplated by the terms of the lease.
This issue recently came before the Ontario Superior Court of Justice in the case of Tradedge Inc. v. Tri-Novo Group Inc., 84 R.P.R. (4th) 84. There, the tenant’s business came under severe financial constraints and it entered into a sale agreement which was conditional on an assignment of the tenant’s lease.
The terms of the lease prohibited the tenant from assigning the lease without the landlord’s consent (such consent not to be unreasonably withheld).
The purchaser (“proposed assignee”) entered into preliminary negotiations with the landlord over the terms of the lease assignment during which it provided the landlord with information about its proposed new business. After reviewing that information, the landlord refused a straight assignment without conditions, alleging that the proposed assignee was not in a satisfactory financial condition.
The landlord was willing to grant its consent if the proposed assignee agreed to pay an increased rent and addressed the landlord’s concerns about its protection in the event of the proposed assignee’s default by agreeing to additional lease terms. However, when the landlord provided these additional lease terms, many of them were unrelated to the proposed assignee’s financial condition. The proposed assignee refused to agree to the additional lease terms but offered to post a $100,000 letter of credit as well as confirmation that its bank had approved a $250,000 loan, including $150,000 for renovations to the premises.
Following further discussions, the proposed assignee agreed to pay the increased rent, as well as a deposit towards the landlord’s legal costs for the assignment. The tenant, however, refused to agree to the assignment unless the landlord agreed to pay the tenant’s legal fees and provide a certain period of rent relief. As a result, consent to the assignment was not given by the landlord and the lease was not assigned.
The tenant left the premises and the landlord leased them to the proposed assignee at a higher rent and with a $175,000 inducement for the landlord to sign the lease. The tenant proceeded to bring an application that the landlord had unreasonably withheld its consent in order to benefit itself by re-leasing the premises.
The court agreed with the tenant and found that the landlord would not have been worse off by consenting to the assignment, but rather may have been better off given the financial condition of the tenant. The landlord had acted unreasonably in refusing to grant its consent to the assignment.
This case illustrates that a landlord’s refusal to grant its consent to a tenant’s request to assign the lease will be seen by the court to be unreasonable where it is designed to obtain a benefit to the landlord which is unconnected to the existing terms of the lease.
Subrogated Claims by Insurers in Commercial Leases (Part VI) - Update on 1044589 Ontario Ltd. v. AB Autorama Ltd.
In several previous posts we have addressed recent cases relating to subrogated claims by insurers in commercial leases. A subrogated claim refers to the claim by which an insurance company seeks recovery of the amount it pays to a policy holder from a third party who may have caused the loss.
In October of 2008, we commented on the Ontario Superior Court of Justice’s decision in 1044589 Ontario Inc. c.o.b. Nantuckett Business Centre v. AB Autorama Ltd. (2008 CanLII 394435 ONSC) (“Autorama”). This post follows a reversal of that decision by the Ontario Court of Appeal.
In Autorama, the landlord and tenant signed an Offer to Lease for an auto body shop in a strip mall. The Offer provided that the tenant would pay its proportionate share of the operating costs of the building, which included the cost of insuring the building. While the tenant was required to contribute to the cost of insurance, the Offer did not contain a corresponding covenant of the landlord to obtain insurance.
A fire started in the tenant’s unit and caused damage to the building and its contents, as well as an interruption of business and a loss of profits for the landlord. The parties brought a motion to the Ontario Superior Court of Justice to decide whether the terms of the Offer permitted the landlord to sue the tenant for damages (and its insurer to make a subrogated claim standing in the shoes of the landlord) or whether, when it included insurance as part of the cost of the tenant’s proportionate share of the cost of the premises, the landlord assumed the risk of damage by fire, and thus could not sue the tenant for damages arising from the tenant’s negligence. The motions judge had held that under the terms of the Offer, the Tenant assumed the risk for any losses caused by the tenant’s negligence and that the Landlord was not precluded from pursuing a claim against the tenant.
The tenant appealed the decision.
The Ontario Court of Appeal allowed the appeal, set aside the order of the motions judge and ordered that the landlord is precluded from maintaining its claim against the tenant.
In reaching its conclusion, the Court of Appeal held that Ross Southward Tire Ltd. v. Pyrotech Products Ltd.,  2 S.C.R. 35 (“Ross”), a Supreme Court of Canada case was in substance identical to the present case and dispositive of the appeal. Ross had been considered by the motions judge, but was incorrectly distinguished on the basis that the landlord had covenanted to insure the property against fire loss (when in fact it had not).
The lease in Ross stated that “the lessee shall pay all realty taxes including local improvements and school taxes, electric power and water rates and insurance rates immediately when due.” The Supreme Court held that the obligation to pay all insurance rates included fire insurance and that because the lessee paid for insurance, it received the benefit of insurance coverage.
The same reasoning was applied by the Court of Appeal in the present case. The provision in the Offer requiring the tenant to contribute to all costs of insurance had the effect of allocating the risk of fire loss to the landlord.
The decision of the Court of Appeal is more in line with the majority of the case law and the generally accepted thinking on the subject. The landlord had insurance which the tenant paid for, so why should the tenant not benefit from that?
This case also illustrates the hazards of parties choosing to live under the terms of an offer to lease, rather than proceeding with a lease. It is likely that the parties here would have turned their minds more fully to insurance obligations and allocation of risk during negotiation of the lease terms and perhaps avoided the litigation.
Landlord's Termination Right in Lieu of Granting Consent to Sublease, Etc.
Almost all commercial leases will restrict a tenant from assigning, subleasing or otherwise dealing with its lease without the consent of the landlord, with the landlord generally agreeing to not unreasonably withhold such consent. It is also very common in a commercial lease to provide the landlord with a right, in lieu of granting such consent, to terminate the lease and take back the space. This is an additional right bargained for by the landlord so it can regain control of the space (rather than let it go to another occupant) if it so desires.
From time to time it seems that the landlord’s exercise of this right following a request for consent comes as a surprise to a tenant. The tenant may be trying to protect a sale of a business, a lower lease rate or some other interest. In those circumstances a tenant may take the position that the landlord’s termination right is not an independent right but must be read in conjunction with its obligation to act reasonably in considering consents.
Two Ontario cases have dealt with this issue.
In 590207 Ontario Limited and 526442 Ontario Limited v. Mascan Corporation and Hammerson Canada Inc. (Ontario District Court, August 15, 1985) the Court held that the landlord was merely exercising its right to elect to terminate the lease in lieu of either giving or withholding consent and in those circumstances it cannot be said that the landlord’s consent was unreasonably withheld. The landlord was simply exercising an option available to it pursuant to the lease and the tenant’s application to determine whether the landlord has unreasonably withheld consent was dismissed.
However, there is a conflicting result in Priftis v. Trilea Holdings Inc. (Ontario District Court, June 17, 1988). In this case, the Court held that the provision in the lease permitting the landlord to terminate on the mere request of the tenant to assign the lease was contrary to the earlier lease provision that consent to an assignment was not to be unreasonably withheld. The Court resolved the ambiguity in favour of the tenant.
This issue was most recently considered in the Alberta decision of Orbus Pharma Inc. v. Kung Man Lee Properties Inc., 2000 ABQB 754 (CanLII). In this case the tenant made a written request to the landlord for its consent to assign the lease. The landlord elected to exercise its option to cancel the lease in preference to giving that consent. The tenant brought an action against the landlord claiming the landlord was in breach of its obligation under the assignment and sublease provisions of the lease for unreasonably withholding its consent.
The landlord argued that the question of being reasonable was not relevant when it exercised its termination right as the landlord’s options were to:
(a) in the event there was a reasonable basis to withhold consent;
(i) withhold consent;
(ii) consent; or
(iii) terminate the lease; and
(b) in the event there was no reasonable basis to withhold consent:
(i) consent to the assignment; or
(ii) terminate the lease.
That is, the landlord argued it could terminate the lease in either case, whether there was a reasonable basis to withhold consent or not.
The tenant took a different interpretation of the lease. In the tenant’s view:
(a) in the event there was a reasonable basis to withhold consent then the landlord could:
(i) withhold consent;
(ii) consent; or
(iii) terminate the lease; and
(b) in the event there was no reasonable basis to withhold consent, then the landlord was limited to consenting to the assignment and the termination right did not operate.
The court agreed with the landlord finding that the landlord had the separate contractual right to terminate the lease in preference to the consenting to the requested assignment. In its decision the court considered the Priftis v. Trilea Holdings case referred to above and found that the lease there was worded differently and therefore that case was not helpful to the tenant.
As with many lease issues, the decision ultimately turned on the drafting of the lease. Once again, this shows the importance of how lease provisions are drafted.
The Purchaser's Right to Rescind: Easements Materially Affecting Use
Typical language in an agreement of purchase and sale provides that the purchaser agrees to accept title “subject to any easements for sewers, drainage, public utilities, phone or cable lines or other services that do not materially affect the present use of the property.” Language such as this is usually found in either a preprinted form that may be used by the parties or in specifically negotiated “Permitted Encumbrances” in larger deals.
In Ontario, the test for whether an easement materially affects the use of a property is set out by Justice Moldaver in Stefanovska v. Kok (1990), 73 O.R. (2d) 368 (Ont. H.C.):
… the test to be applied is whether the vendor can convey substantially what the purchaser contracted to get. In this regard, all of the surrounding circumstances must be considered to determine if the alleged impediment to title would, in any significant way, affect the purchaser’s use or enjoyment of the property.
Justice Forestell, in Ridgely v. Nielson,  O.J. No. 1699 (Ont. S.C.J.), outlined four factors to be considered in determining whether an easement is material: the location of it; the size of the easement; the point of access; and the owner’s enjoyment of the property.
The point at which an easement “materially affects” a purchaser’s use of a property was recently considered by the Ontario Superior Court of Justice in Macdonald v. Robson (2008), 76 R.P.R. (4th) 156.
In this case, the parties entered into an agreement of purchase and sale for a two acre property. The purchaser gave evidence at trial that the property suited his interests as its lay-out would enable him to build a structure on the west side of the property to house his tractor.
The real estate listing for the property made no reference to any easements. However, in fact an easement in favour of the Town of Flamborough affected approximately 25% of the property. The terms of the Easement Agreement permitted access to the property by the Town to deal with sewer systems and required the property owner to keep the easement area free of all obstructions, including buildings and structures. The restrictions imposed by the easement would have prevented the purchaser’s planned construction of a shed and future building projects.
On discovery of the easement the purchaser’s lawyer requisitioned its removal on the basis that it materially affected the purchaser’s intended use for the property. The vendor’s lawyer countered that given the size of the property there were alternate areas where a shed could be constructed. An application to court was launched.
At trial, Justice Wilson of the Ontario Superior Court of Justice considered the tests in Stefanovska and Ridgely (outlined above). Given the purchaser’s intention to use the property to indulge his building hobby, and given the size and location of the easement, it had a material affect the on the present use of the property. Justice Wilson ordered the return of the deposit and held that the purchaser was entitled to rescind the agreement of purchase and sale.
On appeal, Justice Carnwath of the Ontario Superior Court of Justice (
This case is important as it provides insight into when an easement crosses the line between a permitted encumbrance and something that has a material affect on the benefit received by the purchaser. Whether an easement is “material” will be determined on an objective basis, taking into consideration the view of the purchaser.
This case also highlights the importance of a thorough title investigation early in the purchase transaction.
Principal's Liability for Acts of Agents
There are some special rules governing the liability of a principal who has an agent acting on their behalf to sign contracts. The rules are different depending upon whether the party dealing with the agent knows there is a principal behind that agent. Where the principal is not known (an undisclosed principal) there are again differences in the rules depending upon whether the contract is one made under seal or deemed to be under seal by legislation. The recent case of Vicdom Sand & Gravel (Ontario) Limited v. Oak Harbor I Management Limited et al  O.J. No. 5357 (Ont. S.C.J.) is an example of the application of the sealed contract rule to an undisclosed principal.
Disclosed Principal Where an agent enters into a contract on behalf of a principal who is named, and that agent has the authority to enter into that contract, the principal is liable for the performance of the contract. That authority may be either actual authority granted to the agent or apparent authority where the principal has by its conduct given the indication that the agent has authority for such matters. Where a disclosed agent acts outside of both its actual or apparent authority, the agent, and not the principal, will be bound. However, the principal in that situation can ratify the act of its agent. To constitute ratification, three conditions must be satisfied. The agent must have purported to act for the principal, at the time the act was done the agent must have had a competent principal and at the time of the ratification the principal must be legally capable of doing the act itself (see John Ziner Lumber Ltd. v. Kotov, 2000 CanLII 16894 (Ont. C.A.)). Undisclosed Principal Where an agent acts on behalf of an undisclosed principal, the law has recognized that the third party thinks it is dealing with a person acting on its own behalf. However, if that third party ultimately learns of the existence of the undisclosed principal, generally that third party may sue the principal so long as the agent has acted within the scope if its actual authority. There is no concept here of apparent authority because the agency relationship was not known when the contract was made. However, there is an important exception to that rule, which was relevant in the Vicdom Sand & Gravel case. It has long been held that a contract made under seal cannot be enforced against the undisclosed principal. This is inconsistent with the general principle that agents can bind third parties for whom they contract. The rule has been criticized for that reason. On the other hand, it seems to have survived on the basis that it is consistent with commercial reality. The party dealing with the agent does not know there is an undisclosed principal behind the agent and therefore should not get the benefit of any other rights to sue. The Vicdom Case The Vicdom Sand & Gravel case involved an agreement of purchase and sale with a vendor take back mortgage. The agreement of purchase and sale was assigned to Oak Harbor I Management Limited (“Oak Harbor”) and the mortgage back was given by that entity. It later came out that Oak Harbor was the general partner of a limited partnership and therefore acting as agent for an undisclosed principal. Vicdom Sand & Gravel, the mortgagee, attempted to collect from the undisclosed principal. One basis for this was relying on the law that when a person acts as an agent, the transaction can be enforced directly against the principal. However, the court applied the sealed contract rule. By reason of the Land Registration Reform Act, in Ontario every registration document dealing with land is, by statute, to have the same effect as if executed under seal. Accordingly, the mortgage back was considered a sealed contract. As such, Vicdom Sand & Gravel could not proceed against the undisclosed principal.
Where an agent enters into a contract on behalf of a principal who is named, and that agent has the authority to enter into that contract, the principal is liable for the performance of the contract. That authority may be either actual authority granted to the agent or apparent authority where the principal has by its conduct given the indication that the agent has authority for such matters.
Where a disclosed agent acts outside of both its actual or apparent authority, the agent, and not the principal, will be bound. However, the principal in that situation can ratify the act of its agent. To constitute ratification, three conditions must be satisfied. The agent must have purported to act for the principal, at the time the act was done the agent must have had a competent principal and at the time of the ratification the principal must be legally capable of doing the act itself (see John Ziner Lumber Ltd. v. Kotov, 2000 CanLII 16894 (Ont. C.A.)).
Where an agent acts on behalf of an undisclosed principal, the law has recognized that the third party thinks it is dealing with a person acting on its own behalf. However, if that third party ultimately learns of the existence of the undisclosed principal, generally that third party may sue the principal so long as the agent has acted within the scope if its actual authority. There is no concept here of apparent authority because the agency relationship was not known when the contract was made.
However, there is an important exception to that rule, which was relevant in the Vicdom Sand & Gravel case. It has long been held that a contract made under seal cannot be enforced against the undisclosed principal. This is inconsistent with the general principle that agents can bind third parties for whom they contract. The rule has been criticized for that reason. On the other hand, it seems to have survived on the basis that it is consistent with commercial reality. The party dealing with the agent does not know there is an undisclosed principal behind the agent and therefore should not get the benefit of any other rights to sue.
The Vicdom Case
The Vicdom Sand & Gravel case involved an agreement of purchase and sale with a vendor take back mortgage. The agreement of purchase and sale was assigned to Oak Harbor I Management Limited (“Oak Harbor”) and the mortgage back was given by that entity. It later came out that Oak Harbor was the general partner of a limited partnership and therefore acting as agent for an undisclosed principal.
Vicdom Sand & Gravel, the mortgagee, attempted to collect from the undisclosed principal. One basis for this was relying on the law that when a person acts as an agent, the transaction can be enforced directly against the principal.
However, the court applied the sealed contract rule. By reason of the Land Registration Reform Act, in Ontario every registration document dealing with land is, by statute, to have the same effect as if executed under seal. Accordingly, the mortgage back was considered a sealed contract. As such, Vicdom Sand & Gravel could not proceed against the undisclosed principal.