CITATION: Wonderland Power Centre Inc. v. Post and Beam on Wonderland Inc., 2022 ONSC 2237
DIVISIONAL COURT FILE NO.: 125/21
DATE: 20220414
ONTARIO
SUPERIOR COURT OF JUSTICE
(DIVISIONAL COURT)
Hackland, Kristjanson and Nishikawa JJ.
B E T W E E N:
WONDERLAND POWER CENTRE INC.
Respondent (Plaintiff)
Patrick G. Duffy and Jonathan S. Cheng, for the Appellant (Defendant)
- and -
POST AND BEAM ON WONDERLAND INC.
John Goudy, for the Respondent (Plaintiff)
Appellant (Defendant)
HEARD at London by video conference: November 24, 2021
Kristjanson, J.
[1] This is an appeal about the rectification of a restrictive covenant prohibiting the commercial use of a property. A restrictive covenant was registered on title by a predecessor to the respondent Wonderland Power Centre Inc. (“Wonderland”) when it sold a property to the London Public Library Board. Sixteen years later, the property was sold by the London Public Library Board to the appellant Post and Beam on Wonderland Inc. (“Post and Beam”). Post and Beam leased the property for a commercial use. After the sale, Wonderland brought an application to enforce the restrictive covenant prohibiting commercial uses against Post and Beam or to rectify the description of the restrictive covenant on the Land Titles Registry.
[2] In a decision reported as Wonderland Power Centre Inc. v. Post and Beam on Wonderland Inc., 2018 ONSC 7589, Templeton J. found that although it did identify the burdened lands (the “servient tenement”), the restrictive covenant on title was unenforceable as it did not identify the lands to be benefited by the restrictive covenant (“dominant tenement”). But the motion judge granted the motion to rectify the Land Titles Registry to describe the benefited lands. Post and Beam appealed to the Divisional Court. I find that the motion judge erred and would grant the appeal.
Facts
[3] The respondent Wonderland owns and operates a commercial development on several abutting parcels of land. In 2001, the London Public Library Board purchased a parcel of land from a holding company (“Holdings”), which was amalgamated into Wonderland in 2005. The Library Board accepted title to the property subject to a restriction prohibiting commercial usage of the land.
Restrictive Covenants on Title
[4] Holdings as covenantee obtained a restrictive covenant from the Library Board, which it registered on title as described below. Section 119(3) of the Land Titles Act provides that a restrictive covenant may be registered on and run with land. Section 119(4) states that a covenant must not be registered unless four conditions are met:
(a) the covenantor is the owner of the land to be burdened by the covenant;
(b) the covenantee is a person other than the covenantor;
(c) the covenantee owns the land to be benefitted by the covenant and that land is mentioned in the covenant; and
(d) the covenantor signs the application to assume the burden of the covenant.
[5] The only requirement in issue on this appeal is s. 119(4)(c) – that “the covenantee owns the land to be benefitted by the covenant and that land is mentioned in the covenant.”
Unregistered Restrictive Covenant
[6] Holdings attempted to register the restrictive covenant before the closing of the transaction. As described more fully below, Holdings submitted an Application to Annex Restrictive Covenant to the Land Registrar on October 11, 2021. The Application described the abutting lands owned by Holdings that were to benefit from the restrictive covenant, as well as the burdened lands being purchased by the Library Board. The restrictive covenant was defined as follows:
A restrictive covenant is hereby registered against the lands described as Part Lot 36, Concession 2 being Parts 1 &2, PL 33-R-14721, London/Westminster which prohibits the owners, occupiers of the land and any successors and assigns, from carrying on any commercial use on the property for a period of fifty (50) years commencing October 11, 2001.
This restrictive covenant benefits the lands described as Part Lot 36, Con 2. now designated as Pts 3 through 20, PL33R-14721 London/Westminster, being part of PINS 08209-0200 and 08209-0199.
[7] Two parcels of land were to be benefitted by the Restrictive covenant: PIN #08209-0200 and PIN #08209-0199.
a. PIN #08209-0200 contained Parts 3 through 13 and Part 20 on Reference Plan 33R-14721 and was owned by Holdings.
b. PIN #08209-0199 contained Parts 14 through 19 on Reference Plan 33R-14721and was also owned by Holdings.
[8] The application was receipted, but not registered. Section 78(1) of the Act provides that the time of receipt of every instrument submitted for registration must be noted. But under ss. 78(3)-(4) of the Act, an interest in land is not effective until registered. This interest was never registered, and I refer to this as the Unregistered Restrictive Covenant.
[9] Following the sale, PIN #08209-200 was split into two parts. The Library property, being Parts 1 and 2 on Plan 33R-14721 was created as a new parcel (PIN #08209-244). Ownership of the balance of the property: Parts 3 through 13 and Part 20 on Plan 33R-14721 remained with Holdings and formed part of PIN #08209-0636, and Parts 14 through 19 formed PIN #08209-0417.
Registered Restrictive Covenant
[10] Holdings submitted to the Land Titles Registry a second Application to Annex Restrictive covenants. This document is marked “Registered as ER127568 on October 11, 2001 at 15:07”. I refer to this as the Registered Restrictive Covenant.
[11] The Registered Restrictive Covenant identifies the burdened land—the lands bought by the Library Board—but does not identify the benefitted land—the lands owned by Holdings/Wonderland. The Registered Restrictive Covenant provides:
A restrictive covenant is hereby registered against the lands described as Part Lot 36, Concession 2 being Parts 1 &2, PL 33-R-14721, London/Westminster which prohibits the owners, occupiers of the land and any successors and assigns, from carrying on any commercial use on the property for a period of fifty (50) years commencing October 11, 2001.
[12] The second paragraph in the Unregistered Restrictive Covenant, which contained a legal description of the benefitted lands, is not contained in the Registered Restrictive Covenant.
Rejection of Unregistered Restrictive Covenant
[13] The motion judge heard evidence explaining the rejection of the Unregistered Restrictive Covenant and the registration on title of the Registered Restrictive Covenant. She reviewed and accepted the evidence of Elizabeth Cormier, the real estate lawyer for Holdings at the time of the sale of the property to the Library Board. The evidence was that on October 11, 2001, the lawyer submitted the Unregistered Restrictive Covenant, which in paragraph 2 described the benefitted lands. The Application was signed electronically and receipted by the Land Titles Registry. She reported to her client that the restrictive covenant had been registered.
[14] In the months following the closing of this transaction, the Unregistered Restrictive Covenant was replaced by the Registered Restrictive Covenant. Ms. Cormier did not recall the circumstances of the deletion of the second paragraph in the Unregistered Restrictive Covenant.
[15] The motion judge found that the Land Registrar required changes to the Transfer document confirming the transfer of title from Holdings to the Library Board. The motion judge accepted that before registration, the Land Registrar may notify the party submitting the Instrument or the party’s solicitors that the Instrument contains a material error, omission, or deficiency or that there is evidence lacking that the Land Registrar considers requisite. When a change to the Instrument is required by the Land Registrar, the Registrar communicates electronically or by telephone with the solicitor who signed the Instrument and specifies the change that is required before the Instrument can be registered on title. The solicitor may then satisfy the Registrar’s requirements. If those demands are not met, the Instrument will not be registered on title.
[16] The motion judge described Ms. Cormier’s position, which was that the only possible explanation for the deletion of the second statement in the restrictive covenant set out on the Application she submitted was that the Land Registrar directed that the second statement be removed as a condition of the certification of the restrictive covenant. Without a requirement by the Land Registrar to do so, she would not have deleted the second statement.
[17] The motion judge found that Ms. Cormier intended to and did at first comply with all the requirements of the Act to register the Unregistered Restrictive Covenant in her electronic filing with the Land Titles Registry. She found that it appeared that, for some reason, the Application originally submitted by Ms. Cormier was not actually registered on title by the Land Registrar. On the other hand, an amended and legally unenforceable restrictive covenant, also submitted by Ms. Cormier, was registered on title.
[18] The motion judge found at para. 56 that “because the Land Registrar has not retained its documents and Ms. Cormier no longer has her file, there is no documentary evidence either confirming or clarifying the circumstances surrounding the subsequent fundamental change to the restrictive covenant and ultimately its legal effect.” She further found that Ms. Cormier resubmitted the Application to Annex in a form that did not identify the benefitting land, and it was this form that was accepted for registration. The motion judge found there was no evidence before the Court that Ms. Cormier challenged the direction of the Land Registrar then or took any other steps with respect to the Registered Restrictive Covenant.
Listing and Sale of the Library Board Property
[19] The Library Board constructed and operated a library on the property. In 2015, the Library Board listed the property for sale. The Registered Restrictive Covenant was registered on title. The real estate broker, soliciting interest in the property, contacted Wonderland. On June 16, 2015, Wonderland wrote to the listing broker in response:
Thank you for contacting us today for the potential acquisition of the Library. We appreciate receipt of the listing however based on the listed price and restrictive use on title we confirm we have no interest in pursuing this property. The Restrictive Covenant was a material part of the original sale and will not be removed by the writer. We also advise you of a Joint Access and Maintenance Agreement between the two respective properties which should be made available to prospective purchasers.
[20] The Restrictive Covenant on title was the Registered Restrictive Covenant. There is no evidence that Post and Beam saw this communication or that the listing broker was provided any other information by Wonderland. The real estate broker’s listing of the property included the advisement: “See broker for restrictive covenant details.”
[21] In early 2017, York Developments (“York”), the parent company of Post and Beam, began negotiations with the Library Board and City of London to buy the property.
[22] In May 2017, York received legal opinions that the Library Property was zoned for use as office space, and that the Registered Restrictive Covenant on title was not enforceable.
[23] On August 4, 2017, York purchased the property. The agreement of purchase and sale contained only the Registered Restrictive Covenant.
Events After the Sale of the Property
[24] In October 2017, Post and Beam entered a ten-year lease with a company called Zomaron Inc. (“Zomaron”) to rent the property bought by Post and Beam from the Library Board. The former library was extensively renovated to meet Zomaron’s requirements at a significant cost to both Post and Beam and Zomaron.
Decision Below
[25] On November 30, 2017, Wonderland sued Post and Beam to enforce the restrictive covenant. Wonderland also claimed rectification to add the legal description of the benefitted lands. Post and Beam brought a summary judgment motion to dismiss the claim. Wonderland brought a motion for rectification. The motions were heard together.
[26] The motion judge found that the restrictive covenant registered on title was unenforceable. The motion judge declined to allow extrinsic evidence to explain the intentions of the parties and the description of the benefitted lands. She declared that the restrictive covenant as written and as registered does not run with the land and is not binding on Post and Beam. Yet the motion judge granted Wonderland’s motion for rectification, which could make the restrictive covenant enforceable.
[27] The motion judge declined to grant an interim injunction to enforce the rectified restrictive covenant, in part because of the hardship that would be caused to the tenant Zomaron. She found that Zomaron had committed about $200,000 to purchase furniture, equipment, and retrofits. Zomaron had 65 employees and plans to expand. She found that there was no probative evidence that Post and Beam, because of the business of Zomaron, would harm Wonderland or any tenant in the dominant tenement or the Wonderland Power Centre. That said, she found that the claim for a permanent injunction based on a breach of the restrictive covenant required a trial. Thus, she dismissed the summary judgment motion.
[28] Post and Beam now appeals the order rectifying the Land Titles Registry and dismissing the summary judgment motion.
Jurisdiction
[29] There is a statutory right of appeal to the Divisional Court from an order of a Superior Court judge on issues under the Land Titles Act under s. 27 of the Land Titles Act. The Divisional Court granted Post and Beam leave to appeal the dismissal of its summary judgment motion. That appeal was consolidated with Post and Beam’s appeal of the rectification to the Court of Appeal by the order of Brown, J.A. dated June 28, 2019. The consolidated appeal was transferred to the Divisional Court by the order of Hourigan J.A. dated April 6, 2020.
Standard of Review
[30] Rectification is an equitable remedy granted at the discretion of the motion judge. A discretionary order of a motion judge is subject to significant deference on appeal and should be interfered with only where the motion judge misdirected herself, came to a decision that is so clearly wrong that it amounts to an injustice, or gave no or insufficient weight to relevant considerations: see Penner v. Niagara (Regional Police Services Board), 2013 SCC 19, [2013] 2 S.C.R. 125, at para. 27. In addition, an appellate court may intervene where the trial judge exercised his or her discretion based on a wrong principle: see Soulos v. Korkontzilas (1995), 1995 2074 (ON CA), 25 O.R. (3d) 257 (C.A.), at paras. 6, 15, aff'd 1997 346 (SCC), [1997] 2 S.C.R. 217. I am of the opinion that the motion judge exercised her discretion based on wrong principles, misdirected herself, and gave insufficient weight to relevant considerations.
Issues
[31] The key issue is whether the motion judge erred in granting Wonderland’s motion to rectify the Registered Restrictive Covenant by adding a clause identifying the benefitted lands.
[32] The second question presented by the appellant, which is whether the motion judge erred in dismissing Post and Beam’s motion for summary judgment, flows from the answer to the first. Wonderland concedes that if the motion judge’s order rectifying the restrictive covenant is set aside, summary judgment dismissing Wonderland’s action to enforce the restrictive covenant must follow as there would be no genuine issue requiring a trial.
[33] The motion judge correctly identified the issue – that rectification is not available against a bona fide purchaser for value with notice. But she erred in conflating actual notice and constructive notice and in finding that knowledge of a flawed and unenforceable restrictive covenant is to be equated with actual knowledge of a proper and binding restrictive covenant.
Background: Enforceability of Restrictive Covenants
[34] The motion judge correctly concluded that the Registered Restrictive Covenant (absent rectification) is unenforceable and does not bind Post and Beam. Neither Post and Beam nor Wonderland dispute the motion judge’s finding on the unenforceability of the Registered Restrictive Covenant in this appeal. The motion judge correctly recognized that a restrictive covenant registered on title is only enforceable against successor owners if it meets legal requirements enshrined in subsection 119(4) of the Land Titles Act, including that the land to be “benefitted by the covenant” be “mentioned in the covenant”.
[35] Registration alone does not give an instrument force. Section 119(6) provides that: “[t]he entry on the register of a condition or covenant as running with or annexed to land does not make it run with the land, if such covenant or condition on account of its nature, or of the manner in which it is expressed, would not otherwise be annexed to or run with the land” (emphasis added).
[36] The requirement that the land “benefitted by the covenant” be “mentioned in the covenant” reflects a long-standing common law requirement that a restrictive covenant define the land that is to be benefitted by the restriction if it is to run with the land. A person dealing with a parcel of land, such as a prospective purchaser, should be able to determine without further investigation the precise nature and extent of the encumbrances to which the land is subject.
[37] The Supreme Court of Canada in Galbraith v. Madawaska Club Ltd., 1961 16 (SCC), [1961] S.C.R. 639, at para. 23 held that, to be enforceable, “the deed itself must so define the land to be benefitted as to make it easily ascertainable”. The Court held, at para. 24, that a covenant expressed in a deed which does not describe the benefitted lands is personal only and did not run with the land:
[A] restrictive covenant contained in an agreement which omits all reference to any dominant land, although it sets out the restrictions placed upon the servient land, is unenforceable by the covenantee against a successor in title of the covenantor, since such an agreement expresses no intention that any other lands should be benefited by the covenant. A covenant running with the land cannot be created in this manner and in the absence of any attempted annexation of the benefit to some particular land of the covenantee, the covenant is personal and collateral to the conveyance as being for the benefit of the covenantee alone.
[38] Applying these legal principles, the motion judge held that the Registered Restrictive Covenant was not enforceable because it contained no reference to the existence of dominant lands to be benefitted.
Rectification Analysis
[39] Wonderland’s motion for rectification was brought and granted under section 160 of the Land Titles Act:
Subject to any estates or rights acquired by registration under this Act, if a person is aggrieved by an entry made, or by the omission of an entry from the register, or if default is made or unnecessary delay takes place in making an entry in the register, the person aggrieved by the entry, omission, default or delay may apply to the court for an order that the register be rectified, and the court may either refuse the application with or without costs to be paid by the applicant or may, if satisfied of the justice of the case, make an order for the rectification of the register. [Emphasis added.]
[40] The “estates or rights acquired by registration under this Act”, as referred to in s. 160, are generally set out in s. 78(4) of the Act, which provides that an instrument is effective when registered “according to its nature and intent”:
When registered, an instrument shall be deemed to be embodied in the register and to be effective according to its nature and intent, and to create, transfer, charge or discharge, as the case requires, the land or estate or interest therein mentioned in the register.
[41] Rectification of registered interests after purchase by a third party is of particular concern because of the importance of the reliability and integrity of the land registry to all aspects of land law and conveyancing. Certainty is critical to conveyancing. As stated by the Divisional Court per curiam in 1168760 Ontario Inc. v. 6706037 Canada Inc., 2019 ONSC 4702, at paras. 13-14:
13 The LTA establishes the land titles regime in Ontario. Its essential purpose is to "provide the public with security of title and facility of transfer" by setting up a register and guaranteeing that the person shown as the registered owner is the legal owner, subject only to registered encumbrances and enumerated statutory exceptions.
14 There are three principles found in the land titles regime that together embody the doctrine of indefeasibility of title:
• The mirror principle, whereby the register is the perfect mirror of the state of title;
• The curtain principle, which holds that the purchaser need not investigate past dealing with the land, or search behind the title as depicted in the register; and
• The insurance principle, whereby the state guarantees the accuracy of the register and compensates any person who suffers loss as the result of an inaccuracy. [Citations omitted.]
Actual Notice, Not Constructive Notice
[42] The motion judge correctly held that the court’s powers of rectification under ss. 159 and 160 of the Land Titles Act are qualified or limited by reference to the indefeasibility of title that follows from registration, and that a purchaser only obtains the benefit of indefeasible title if he or she is a bona fide purchaser for value without notice.
[43] But the fundamental and the key point in this appeal is that notice must be actual notice of the interest. The motion judge erred in conflating the concepts of actual notice and constructive notice. The motion judge fell into error at para. 92 by conflating a contractual covenant with a restrictive covenant running with the land. She held:
With full knowledge of the restriction regarding commercial use of the property, Post and Beam proceeded with the purchase in any event. In my view, the knowledge and willingness of Post and Beam to run the risk that the restrictive covenant could or would not be rectified militates in favour of a finding that it would be unjust not to rectify the restrictive covenant. [Emphasis in original.]
[44] In finding that Post and Beam had notice of the Unregistered Restrictive Covenant, the motion judge failed to distinguish between knowledge of the existence of a potential interest in land and knowledge of the benefitted lands. Knowledge of the benefitted lands is required, under the common law and s. 119(4)(c), before an interest runs with the land. The motion judge found that Post and Beam knew about the Registered Restrictive Covenant, which did not identify the dominant tenement—it was attached to the agreement of purchase and sale. Further, she found that during the negotiations to purchase the property from the Library Board, Post and Beam received legal advice that a restrictive covenant was on title but that it was unenforceable. She then found at para. 91:
Prior to closing, therefore, Post and Beam were fully aware that (a) the subject property was located adjacent to a large multi-commercial shopping and business area identified in the advertisement as “Wonderland Power Centre”; (b) the property was just “steps” away from Wonderland Power Centre which consisted of “major retailers” according to the same advertisement; and, (c) Wonderland had applied for and obtained a restrictive covenant which prohibited the owners, occupiers of the land and any successors and assigns of the property to be purchased from the Library Board from carrying on any commercial use on the property for a period of fifty (50) years commencing October 11, 2001.
[45] This is not the same, however, as actual knowledge of the description of the benefitted lands (the dominant tenement), which must be “easily ascertainable” by review of the registered document.
[46] By purchasing the Library Property, Post and Beam acquired fee simple title subject to the encumbrances registered on title. Post and Beam was not a party to the original sale of the Library Property to the Library Board and was not privy to the negotiations between the Library Board and Holdings. Post and Beam relied on the Registered Restrictive Covenant and was unaware of the Unregistered Restrictive Covenant at the time of purchase. There is no suggestion that its purchase of the Library Property was fraudulent. This makes Post and Beam a bona fide purchaser for value without notice.
[47] As a bona fide purchaser for value without notice, Post and Beam had a right to rely on what was registered on the Library Property's title without further investigation. Consistent with the underlying equitable principles and ss. 159 and160 of the Land Titles Act, absent fraud or actual notice, the rights that Post and Beam acquired cannot be defeated by rectification that arises from a transaction to which it was a stranger. As Epstein J. (as she then was) noted in Durrani v. Augier, 2000 22410 (ON SC), 190 DLR (4th) 183 (Ont. S.C.), at para. 49, the court has no jurisdiction under s. 160 to interfere with a registered interest:
It is significant that both sections dealing with the power of the court to rectify the register start with the words "subject to any estates or rights acquired by registration under this Act". These words relate back to the concept of indefeasibility of title and to the fundamental objectives of the land titles system discussed earlier. Their import is as follows. Where a bona fide purchaser for value succeeds in becoming a registered owner, the fact of registration is conclusive. Indefeasibility of title is a consequence or incident of that registration. Accordingly, the court does not have jurisdiction to rectify the register if to do so would interfere with the registered interest of a bona fide purchaser for value in the interest as registered.
[48] The motion judge erroneously found jurisdiction by concluding that Post and Beam had lost the benefit of indefeasible title because Post and Beam had notice that a restrictive covenant existed. Yet the motion judge failed to recognize that the instrument on title only provided Post and Beam with notice of the unenforceable Registered Restrictive Covenant. Post and Beam had no notice of the Unregistered Restrictive Covenant.
[49] As the Court of Appeal stated in Stanbarr Services Limited v. Metropolis Properties Inc., 2018 ONCA 244, 141 O.R. (3d) 102, at para. 26:
Because notice has been considered to be one of a limited number of exceptions to the mirror principle, it has been strictly construed. Our courts insist on actual notice of a defect. Actual knowledge means just that; the party must actually know about the defect. It is not sufficient that it has become aware of facts that may suggest it should make inquiries. Constructive knowledge is insufficient. Thus, the factual analysis in considering a notice argument is limited to a consideration of what the party knew, not what it could have known had it made inquiries. [Citation omitted; emphasis added.]
[50] The Court of Appeal in Stanbarr underscored the importance of differentiating the concepts of actual and constructive knowledge at para. 28:
In determining whether a party has actual knowledge of a defect, it is unnecessary and unhelpful to consider whether they received sufficient information to put them on inquiry. That is because receipt of such information does not amount to actual knowledge. Therefore, whether the party received such information and what steps it took to investigate the situation is wholly irrelevant to the actual knowledge analysis. [Citation omitted.]
[51] The statutory remedy of rectification is available when a party has actual notice of an interest in land that varies from the interest shown in the register. Post and Beam did not have actual notice of the benefitted lands. There was no finding in the evidence that Post and Beam knew of the extent of the dominant tenement. Perhaps Post and Beam could have guessed that Wonderland was the covenantee, but it was not required to do so, and it is unnecessary and unhelpful to consider whether it had sufficient information to put it on inquiry.
[52] The Supreme Court of Canada in United Trust Co. v. Dominion Stores Ltd., 1976 33 (SCC), [1977] 2 SCR 915, held that actual notice can defeat a registered owner's claim to priority over an unregistered interest. The facts of United Trust illustrate the kind of knowledge that amounts to the actual notice required to defeat registered interests under the Land Titles Act. The purchaser, United Trust, knew about and insisted that an unregistered lease be surrendered before the sale closed. It was actively dealing with the tenant before closing expressly on the basis that a lease existed; it was negotiating for a surrender of the lease. When the purchaser's negotiations with the tenant to surrender the lease reached an impasse, the purchaser waived a pre-closing requirement that the lease be surrendered, closed the transaction, and then sought to lock the tenant out of the premises because its registered interest prevailed over the tenant's unregistered lease.
[53] The actual notice required to defeat a registered interest under the Land Titles Act therefore requires advertent knowledge, not simply a failure to make inquiries. Post and Beam was alleged to have actual notice that the benefitted lands were some unspecified lands owned by Wonderland. At its highest, this may have raised a suspicion that some portion of undescribed adjacent lands were the intended dominant tenement. This does not equate to actual knowledge.
[54] What Post and Beam did know was that the restrictive covenant was invalid. Post and Beam did not have a duty to inquire into why the instrument was invalid. Post and Beam had actual knowledge of the unenforceable restrictive covenant on the registry – why should it have to look any further? It was entitled to rely on the mirror and curtain principles of the Land Titles Act.
[55] The decision in Durrani does not diminish or change the test for actual notice. Durrani, unlike this case, involved a purchaser who was expressly found not to be bona fide. In assessing whether a purchaser of property from a fraudulent paralegal had notice of the fraud, Epstein J. disbelieved the purchaser's agent's testimony about her involvement in the transaction and made a positive finding that she had actual notice of the fraud. There is no indication in Durrani that Epstein J. intended to upset the established law of actual notice.
[56] The Court of Appeal for Ontario in Sekretov v. Toronto (City), 1973 712 (ON CA), [1973] 2 O.R. 161, at pp. 165-66 held:
The law of Ontario and of the other common law Provinces plainly require that the dominant land for the benefit of which a restrictive covenant is imposed in a deed from the covenantee to a purchaser of other lands of the covenantee must be ascertainable from the deed itself; otherwise, it is personal and collateral to the conveyance as being for the benefit of the covenantee alone and not enforceable against a successor in title to the purchaser. This was laid down by Judson, J., in Galbraith v. Madawaska Club Ltd., supra, in the plainest terms, the minimum requirement being, as the learned jurist stated, that the deed itself must so define the land to be benefited as to make it easily ascertainable.
The language used in the Madawaska Club case clearly excludes any notion of annexation to dominant land by implication.
[57] Since the description of the benefitted lands is not contained in the Registered Restrictive Covenant and cannot be established from a registry search, the covenant in the Registered Restrictive Covenant is personal and collateral to the conveyance as being for the benefit of the covenantee alone (Holdings/Wonderland) in the purchase by the Library Board. It is not enforceable against a successor in title to the purchaser Library Board.
[58] Because the motion judge conflated actual and constructive notice, she erred in principle by faulting Post and Beam for proceeding with the purchase after seeking legal advice about the enforceability of the Registered Restrictive Covenant. A prospective purchaser has a right to seek legal advice about a restrictive covenant's validity and must be able to rely on that legal advice when closing a transaction. There is nothing objectionable about such conduct - indeed the land titles system is constructed on this very concept. As the Court of Appeal for Alberta held in Kolias v. Owners: Condominium Plan 309 CDC, 2008 ABCA 379, 303 D.L.R. (4th) 314, at para. 18:
Even where an appeal court is free to change the law, it is usually a bad idea to do so where people have come to rely upon that law and to found transactions upon it. Conveyancing is always held to be such a topic. People must be able to get and rely upon legal advice as to which transactions are valid. Similarly, they must be able to rely on legal advice as to which clouds on land titles are not valid, and can be safely accepted when closing a purchase.
[59] This interpretation also reflects the curtain principle underlying the Land Titles Act, which holds that a purchaser need not investigate the history of past dealings with the land or search behind the title as depicted on the register: Stanbarr, at para. 47.
[60] The sufficiency of the register is critical to conveyancing in this province. The Law Society of Ontario has provided lawyers with practice guidelines about the electronic registration of title documents: Practice Guidelines for Electronic Registration of Title Documents, as approved by Convocation, June 28, 2002. The Guidelines make clear at p. 14 that, consistent with the principles of the land titles system, the purchaser's lawyer need not make further inquiries beyond the law statements to determine the accuracy of the statement:
Lawyers need not look to nor request nor require evidence behind registered compliance with law statements, but rather should rely upon provisions of the Land Titles Act as to the sufficiency of title once certified. The entire TERS and Land Titles system is premised on the sufficiency of the register to establish title to real property.
[61] The approach taken by the motion judge, however, conflicts with the mirror and the curtain principles and undermines the sufficiency of the register to establish title. It raises questions: at what point should a prospective purchaser decide not to rely on the Land Titles Registry and inform a vendor that, if it had attempted to create an interest in land, it had failed? Is the burden on a prospective purchaser to advise the vendor and wait, prior to purchase, to see if the vendor does something? Or does the purchaser wait to see if either the vendor or the covenantee act to rectify post-purchase and, if they do, run the risk of rectification? This is exactly the scenario rejected by the Court of Appeal in Sekretov when it stated, referring to a purchaser buying lands burdened by a restrictive covenant wherein the covenantee and the benefitted lands were not identified: “[h]e is placed in a most precarious position if he must first breach the covenant and then wait in fear and trembling to see if he is to be sued.”
[62] The burden of the error does not fall on a bona fide third-party purchaser without notice of the intended benefitted lands, where the description of the benefitted lands appears nowhere in registered restrictive covenant. The burden of the error falls on the owner of the benefitted lands who failed to properly register an enforceable interest.
Indefeasibility Extends to Quality of Title
[63] The motion judge also erred in law and in principle when concluding that the rectification “does not impact the indefeasibility of Post and Beam's title to the property that followed from registration.” The motion judge considered indefeasibility only as it related to ownership of the property, disregarding that indefeasibility also applies to the quality of an owner's title. As the motion judge acknowledged, Post and Beam's use and enjoyment of the Library Property is directly impacted by rectification of the Registered Restrictive Covenant. It entered a commercial lease with a tenant and undertook very costly leasehold improvements. The rectification constitutes an interference with the indefeasible rights that Post and Beam acquired as a bona fide purchaser for value without notice.
[64] In her consideration of indefeasibility, the motion judge cited the decision of Winkler C.J.O. in MacIsaac v. Salo, 2013 ONCA 98, 114 OR (3d) 226. In so doing, she failed to appreciate the important differences between the Court of Appeal’s decision in MacIsaac and the immediate case. In MacIsaac, the Court relied on s. 160 of the Land Titles Act to rectify a reference plan deposited with the registrar that did not accurately reflect the location of an access road. The Court emphasized that a reference plan does not independently create an interest in land (unlike a registered instrument) and is only a description of the boundaries of a parcel as they exist on the ground. Winkler C.J.O. explained that the distinction arises because of the exception to indefeasibility created by s. 140(2) of the Land Titles Act, which states that the description of registered land is not conclusive as to the boundaries or extent of the land. For these reasons, concerns about the quality and indefeasibility of title did not arise and s. 160 could be used to correct an admittedly inaccurate reference plan: MacIsaac, at paras. 36-49, 54-56.
[65] By contrast, prospective purchasers evaluating a restrictive covenant registered on title may rely on the Land Titles Registry as stated in s. 78(4) of the Act. Prospective purchasers have no equivalent to a survey that can be used to independently evaluate the accuracy of the registered instrument or the existence of any unregistered instruments. Indeed, s. 72(1) of the Land Titles Act, which deals with unregistered instruments, provides that:
No person, other than the parties thereto, shall be deemed to have any notice of the contents of any instruments, other than those mentioned in the existing register of title of the parcel of land or that have been duly entered in the records of the office kept for the entry of instruments received or are in course of entry.
[66] The motion judge held that Post and Beam should have known there was a risk the Registered Restrictive Covenant would be rectified. In reaching this conclusion, the motion judge overlooks that Ontario courts have never used s. 160 of the Land Titles Act to rectify a restrictive covenant by adding a description of the benefitting land after purchase by a third party where the owners of the benefitted lands were not a party to the later sale transaction, and there was no fraud or actual notice. It was unreasonable for the motion judge to fault Post and Beam for not foreseeing that a court would take the unprecedented action of rectifying an otherwise unenforceable restrictive covenant in these circumstances.
[67] For all these reasons, I find that the motion judge exercised her discretion based on wrong principles, misdirected herself, and gave insufficient weight to relevant considerations.
Due Diligence and Restoration to Original Position
[68] The failure to properly identify the benefitting lands lies with Wonderland and its lawyer: Post and Beam played no role. Even if the land registrar erred in refusing to register the original application which contained the description of the benefitting lands, Wonderland failed to pursue an appeal under s. 26 of the Land Titles Act.
[69] I also agree with the appellant that, because of the delay in seeking rectification until after title passed to the next purchaser, the parties cannot be put into the same position they would have been in had the mistake not been made. It would be unjust to modify a restrictive covenant where third parties relied on the language registered on title. Post and Beam relied on the restrictive covenant as registered and took action based on that document: see Augdome Corp. v. Gray, 1974 172 (SCC), [1975] 2 S.C.R. 354; Consortium Capital Projects Inc. v. Blind River Veneer Ltd. (1988), 1988 4793 (ON SC), 63 O.R. (2d) 761 (H.C.J.), at p. 766, aff’d 1990 6604 (ON CA), 72 O.R. (2d) 703 (C.A.).
Order
[70] Subsection 134(1) of the Courts of Justice Act, R.S.O. 1990, c. C.43 sets out the powers of a court hearing an appeal. Generally, unless otherwise provided, the court can make any order or decision that ought to or could have been made by the court or tribunal appealed from, order a new trial, or make any other order or decision considered just. A new trial should be ordered only if some substantial wrong or miscarriage of justice has occurred (s. 134(6) and (7)). I must therefore consider the factors relevant to the exercise of discretion. I would exercise my discretion to refuse rectification for the reasons set out above.
[71] The appeal is allowed and the order of the motion judge rectifying the land registry is set aside. The motion for summary judgment dismissing the application is granted.
Costs
[72] The parties have agreed on costs. Costs for the appeal are awarded to Post and Beam in the amount of $19,500. The parties have agreed that if the appeal succeeds, the appellant should be awarded $35,000 for the motions below. The respondent is to pay the appellant its costs of the appeal in the amount of $19,500, inclusive, and costs of the motions below in the amount of $35,000, inclusive.
“Kristjanson J.”
I agree: “Hackland J.”
I agree: “Nishikawa J.”
Released: April 14, 2022
2022 ONSC 2237
DIVISIONAL COURT FILE NO.: 125/21
DATE: 20220414
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
Hackland, Kristjanson and Nishikawa JJ.
BETWEEN:
WONDERLAND POWER CENTRE INC.
Respondent (Plaintiff)
– and –
POST AND BEAM ON WONDERLAND INC.
Appellant (Respondent)
reasons for judgment
Released: April 14, 2022