Canada: A Lesson In Maintaining Privity: SCC Resolves Dispute Over Interpretation Of Alberta Agreement

On May 6, 2016, in Heritage Capital Corp. v. Equitable Trust Co., the Supreme Court of Canada (SCC) weighed in on one of the many disputes stemming from the foreclosure proceedings taken with respect to the historic Lougheed Building in downtown Calgary. This particular dispute concerned the entitlement to certain payments from the City of Calgary connected to the designation of the Lougheed Building as a Municipal Historic Resource under section 26 of the Historical Resources Act (HRA).

The decision illustrates the principle differences between property and contract law, implicitly emphasizing common law principles around privity of contract and privity of estate, including the scope of the statutory exception created by the HRA, which allows a narrow subset of positive covenants to run with lands designated as historic resources. The decision is also significant as it is one of the first times the SCC has considered its decision in Sattva Capital Corp. v. Creston Moly Corp., on the issue of the standard of review applicable in contractual interpretation cases.

BACKGROUND

In the summer of 2004, the City of Calgary (City) enacted a bylaw designating the Lougheed Building as a historic resource under the HRA. At that time, the Lougheed Building was owned by the Lougheed Block Inc. (LBI), which had acquired the property the year prior to the designation.

The HRA provides for compensation to owners of buildings designated as historic resources. This is because the designation means the owner will be subject to certain restrictions and obligations relating to the rehabilitation and maintenance of the property in order to meet the standards expected of a heritage building. An owner cannot permanently affect a designated building except in accordance with certain standards and guidelines. Accordingly, if the restrictions placed on the designated property result in its decreased economic value or the incurring of expenses with respect to its rehabilitation, the City is required to compensate the owner. This is what happened when the Lougheed Building was designated as a historic resource, requiring the restoration to its original appearance in 1912. As such, LBI and the City entered into the "Lougheed Building Rehabilitation Incentive Agreement" (Incentive Agreement).

Under the Incentive Agreement, LBI agreed to rehabilitate the Lougheed Building over the course of four years in exchange for C$3.4-million paid in 15 annual instalments by the City, which began in 2007 upon completion of the rehabilitation work. A copy of the Incentive Agreement was registered by way of caveat on title. This structuring of the compensation payment to LBI ultimately led to the dispute before the SCC.

Near the end of 2006, LBI borrowed C$27-million from The Equitable Trust Company (Equitable). This loan was secured by a mortgage against the Lougheed Building in addition to other collateral security, including an assignment of the Incentive Agreement. Approximately six months later, LBI borrowed a further C$2.7-million from Heritage Capital Corporation (Heritage), also assigning the Incentive Agreement to Heritage as security for the loan.

LBI defaulted in paying Equitable's loan and Equitable commenced foreclosure proceedings with respect to the Lougheed Building in June 2009. Ultimately, in the summer of 2010, an offer to purchase the Lougheed Building by Allied Properties Reit Acquisition Corporation (Allied) was accepted by the court with a closing date for the transaction set for September 1, 2010. As a result of the mechanics of the transaction, the purchaser of the Lougheed Building was the wholly owned subsidiary of Allied, 604 – 1^st Street S.W. Inc. (604).

Leading up to the closing date and triggering this litigation, 604 contacted LBI asking for an assignment of the Incentive Agreement and any future payments owing under it. LBI refused, arguing that the payments under the Incentive Agreement were not included in the judicial sale. LBI then brought an application for a declaration that the payments under the Incentive Agreement were not interests in land and did not form part of the assets sold to 604.

This issue of who was entitled to receive the balance of the payments under the Incentive Agreement as between 604 as current owner of the Lougheed Building and Heritage as creditor of LBI, is the subject of the SCC's decision.

SCC DECISION

In allowing Heritage's appeal, the SCC disagreed with the majority of the Alberta Court of Appeal and held the right to the incentive payments was merely contractual, as opposed to a sui generis historic resource covenant that runs fully with the land. The SCC further held that the incentive payments were not included in the judicial sale to 604. Accordingly, the party entitled to the balance of the incentive payments was the assignee of the Incentive Agreement from LBI (which was either Heritage or 604, by virtue of a post-closing assignment by Equitable to 604 of its security interest in the incentive payments). This priority issue was remitted to a master in chambers to be determined following the release of the SCC's decision.

In addressing the standard of review, the SCC specifically disagreed with 604's submission that the chambers judge's interpretation of the Incentive Agreement and the 604 offer to purchase were reviewable on a standard of correctness as an extricable question of law. Applying its decision in Sattva Capital Corp. v. Creston Moly Corp., the SCC held that while correctness was the appropriate standard for reviewing the interpretation of the common law as well as the HRA, the palpable and overriding error standard applied to the interpretation of the Incentive Agreement and 604's offer to purchase as the chambers judge's interpretation of the contractual documents was not tainted by a misunderstanding of the HRA. The SCC then focused the majority of its analysis on the interpretation of section 29 of the HRA as creating a narrow exception to the common law rule that positive covenants do not run with the land.

The HRA provides that a covenant relating to the preservation or restoration of any land or building designated as a historic resource runs with the land and can be enforced whether it is positive or negative, so long as the covenant is in favour of the following persons or organizations: the Minister; the council of the relevant municipality; the Foundation; or an historical organization approved by the Minister. The SCC held that because the positive obligation to pay the incentive payments was not a covenant in favour of the City, it did not run with the land under the HRA. Therefore, although 604 was subject to the covenants in favour of the City restricting the use of the Lougheed Building, it was not privy to the contractual covenant in favour of LBI as previous owner because this covenant did not run with the land, regardless of its registration on title.

Further, the SCC held that 604 was not privy to the covenant in favour of LBI by virtue of the terms of any of the documentation involved in the judicial sale, as they did not indicate an intention by the court to sell the incentive payments or a corresponding intention by 604 to buy them.

With respect to the language of the Incentive Agreement, the SCC endorsed the master's interpretation of the boilerplate provisions relating to the inurement of the Incentive Agreement, in particular that the term "successor" meant a corporate "successor in title" and did not include a "subsequent owner" given the deliberate use of these terms. The definition of "property" in the Incentive Agreement was also considered, which solely referenced the legal description of the Lougheed Building (the real property).

604's offer to purchase only listed the ancillary property to be included in the sale and did not explicitly include LBI's contractual right under the Incentive Agreement. It should be noted that the SCC interpreted the provision of 604's offer that stated all "contracts that are assignable" would be assigned to it on closing as merely addressing the process for transferring the ancillary property, rather than expanding the definition of the property acquired in the judicial sale. 604's failure to mention the incentive payments in its offer, given their substantial value, was held by the SCC to be indicative that 604 did not intend to purchase them.

The SCC held that it did not make commercial sense and would be an "undeserved windfall" if 604 were to be granted the benefit of the incentive payments when it had already (presumably) factored in the designation of the Lougheed Building as a historic resource into its offer to purchase. Further, LBI, not 604, had incurred the expenses connected with the rehabilitation of the property. The mere fact that the compensation payments for these expenses and diminution of property value were structured to be paid over 15 years as opposed to in a lump-sum (as they could have been), did not change the nature of the payments at issue as being a chose in action.

CONCLUSION

In coming to its decision, the SCC highlights one of the fundamental differences between property law and contract law: the relevancy of a party's intention. When these doctrines are both operative, one should be wary to assume that being subject to the burden of a covenant means you also take its benefit.

Whether the incentive payments ran with the land is a question of property law. Therefore, the intention of the parties was irrelevant. Rather, the conclusion rested solely on the SCC's interpretation of the HRA as providing a narrow exception to the general common law rule.

As the right to the incentive payments does not run with the land as a matter of law, the only way in which the incentive payments were to accrue to 604 was if they were included in the property it purchased through the judicial sale. That was deemed to be a question of contractual interpretation and accordingly, the parties' intentions are relevant.

Practitioners should take note of the SCC's comments and process in its interpretation of the agreements at issue. In particular, the SCC's decision suggests that the use of explicit language is prudent in order to ensure a particular asset, especially of substantial value, is being acquired.

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