Tuesday 29 October 2013

Alberta Court Upholds Land Titles System

    Homestead Record, Alberta Archives

In Alberta, all interests in land are recorded in a Torrens registration system, often referred to as a "Land Titles" system.  A title search produces a certificate listing all registered interests in the parcel of land searched.  Anyone interested in acquiring the land can rely on the certificate as a complete list showing who owns the property and any mortgages, liens, or other interests effecting title.  Unregistered interests are not protected.  The only exception is in cases of fraud.
This system can sometimes lead to harsh results, as is illustrated in a recent case in the Albert Court of Queen's Bench.  A builder constructed a "show home" on a lot in a development, relying on a contract that said the developer had to transfer title in the lot to the builder once construction of the show home began.  All of the lots in the development were subject to a mortgage in favour of the Bank of Montreal.  The developer went into receivership without transferring title to the builder, although the builder had nearly completed the home.  The receiver sold the property, and it was agreed that the value of the home (as opposed to the lot itself) was in excess of $140,000.  This amount was placed in a trust account until entitlement to the proceeds could be determined in court.
The court concluded that the Bank's registered mortgage had priority over the unregistered equitable interest claimed by the builder based on unjust enrichment: Bank of Montreal v. 1323606 Alberta Ltd., 2013 ABQB 596.
The builder, Coco Homes Ltd., claimed an equitable interest in the proceeds, arguing that if the money went to the Bank it would be acquiring the benefit of the construction work without paying anything for it; essentially, an unjust enrichment argument.  Coco also relied on s. 69 of the Law of Property Act, RSA 2000, c. L-7, which creates a statutory lien in favour of someone who has made a lasting improvement to land in the belief that he owned it.
The Bank's case was based on s. 203(2)(a) of the Land Titles Act, RSA 2000, c. L-4.  Section 203 states that anyone dealing with a transfer, mortgage, or other interest in land is not bound by a trust or other interest in the land unless it is registered in the Land Titles system.  In addition, section 203(2)(b) provides that a party dealing with the land is unaffected by any notice of a trust or other unregistered interest in the land or by any rule of law or equity that might create an interest in the land.
Madam Justice Topolniski considered the public policy basis for the Torrens system, stating that the certificate of title "...is designed to meet a simple policy goal - to provide a clear, definitive mechanism to evaluate the status of land".  The objective of the system is to save purchasers and mortgagees the trouble and expense involved in going behind the register in order to investigate the validity of the owner's title.
The judge acknowledged that a Torrens system can impose hardships, noting that the legislation provides for compensation for those who suffer a loss out of an assurance fund.

Relying on decisions of the Supreme Court of Canada and the Ontario Superior Court, Justice Topolniski concluded that the legislation was a complete bar to the homebuilder's claim.  Under a Land Titles system, an unregistered interest has no effect on the registered title of a purchaser for value: United Trust Co. v. Dominion Stores Ltd., [1977] 2 S.C.R. 915.  Section 203 of the Act "represents an unequivocal abrogation of the doctrine of actual notice in Alberta such that, absent fraud, an unregistered interest cannot under any circumstances trump a registered interest.": Romspen Investment Corp. v. Edgeworth Properties, 2012 ONSC 4693.  The effect of s. 203 of the Land Titles Act is to extinguish Coco's claim, whether it arises out of common law, equity, or statute.

With respect to the argument under s. 69 of the Law of Property Act, the judge concluded that granting priority to an unregistered interest would defeat the intent of the legislature in adopting the Torrens system.  Section 69 applies where a person improves someone else's land "under the belief that the land was the person's own".  Although Coco had a contractual right to a transfer of title, it could not have held an honest belief that it owned the land at the time the developer went into receivership, so the claim under s. 69 failed.

Coco argued that the Bank could not take title to the improvements under the Nemo Dat rule (nemo dat quod non habet, or "no-one gives what he doesn't have").  Since the developer had not paid for the improvements, it didn't own them and couldn't mortgage them to the Bank.  The judge rejected this argument because fixtures permanently attached to the land become part of the land.

Finally, the court rejected the constructive trust argument, citing Supreme Court authority stating that a constructive trust cannot apply to the prejudice of a third party: Soulos v. Korkontzilas, [1997] 2 S.C.R. 217.

Although the outcome may seem like a windfall for the Bank, which did not finance the construction of the model home, on reflection it is fair.  The homebuilder was free to search title prior to starting work, and would have been aware that the lot was subject to a mortgage in favour of the Bank.  Coco could have insisted that the developer make arrangements to have the mortgage discharged before it built the home, and could have stopped work as soon as it became clear that the developer was not going to transfer title.

It is in the public interest that there should be a searchable registry available that provides an interested party with a complete picture of the state of title, so that people who buy, sell, and mortgage property know where they stand when they enter into a transaction.  As the judge determined, the legislature intended to provide such a registry when it created the Land Titles system, and giving registered interests priority over unregistered claims based on trust or statute is a necessary consequence.

Bank of Montreal v. 1323606 Alberta Ltd., 2013 ABQB 596

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Any legal information provided is general in nature and may not apply to particular situations. It does not constitute legal opinion or advice. Please consult your lawyer regarding your specific legal issue.

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