Positive Covenants, Parallel Contracts, Post-Incorporation Contracts and Termination
In the recent decision of The Owners, Strata Plan NW 2301 v The Owners, Strata Plan NW 2364, 2022 BCSC 527 (CanLII) the original owner developer owned and developed two neighbouring parcels of land into strata properties. As part of the approval process, the owner developer entering into an agreement with Burnaby the terms of which included that several amenities facilities (sport courts, swimming pool, etc.) would be constructed on parcel A, parcels A and B could use the amenities and parcel B would contribute to the costs of maintenance of the amenities.
Approval by Burnaby was given, parcel A and parcel B were built as planned and a covenant was registered on title to the two properties which, among other things, set out the obligations of parcel B to contribute to the maintenance of the amenities.
For several years the owner developer continued to own both parcels A and B, renting out units, before eventually selling the units in both stratas. For more than 25 year after that, the owners of parcels A and B through their respective strata corporations acting in a manner consistent with the covenant.
In 2019, in apparent response to some anticipated significant capital expenses for the shared amenities, the strata corporation for parcel B purported to terminate its shared amenities agreement and stated that it would thereafter not be contributing to maintenance of the amenities.
Parcel A argued that the covenant was enforceable under s. 219 of the Land Title Act as that section created an exception to the ordinary rule that positive covenants, covenants requiring a party to do something, are generally not enforceable. In the alternative, Parcel A argued based on the Supreme Court of Canada’s recent decision in Owners, Strata Plan LMS 3905 v. Crystal Square Parking Corp., 2020 SCC 29 that parcel B that the amenities arrangements constituted an enforceable post-incorporation contract.
Parcel B argued that there was no post-incorporation of a contract such that Parcel A had nothing to enforce. In the alternative, it argued that if there was post-incorporation of a contract, it could be terminated by reasonable notice.
The Court began its legal analysis with reviewing the Crystal Square decision. The findings of Crystal Square were summarized at para. 35 as follows:
…[T]he Supreme Court of Canada underwent an analysis of the differences between restrictive covenants registered against land on the one hand and the enforcement of contractual obligations on the other. As a general rule, negative covenants that are registered against land are enforceable against subsequent owners, whereas positive covenants are not. On the other hand, contractual obligations may be either negative or positive, but are only enforceable against parties who are privy to the contract.
In essence, a positive covenant could not be enforceable against subsequent owners (IE the strata of Parcel B after the properties were sold by the owner developer and in subsequent sales) unless subsequent owners assumed a contract by way of their conduct.
The Court also noted that s. 219 of the Land Title Act creates an exception to the general rule that positive encumbrances cannot run with title. There was nothing about the covenant in question being positive in nature which invalidated the covenant or made it unenforceable; rather, the purpose of s. 219 is to grant covenants in favour of public bodies such as Burnaby. Similarly, the law was that only such public bodies could seek to enforce a s. 219 covenant, not a third-party such as parcel A. Put another way, only Burnaby could enforce the obligation of parcel B to contribute to the amenities, not parcel A.
The Court found that the thrust of the case was that for 25 years the owners of the units in parcel A and parcel B had acted in a manner consistent with the terms of the covenant. The Court was unconvinced that an example of certain provisions having never been followed by either parcel did not change this finding. As such, the two stratas had entered into a post-incorporation contract.
Having found there was a contract, the Court then had to turn its concern to whether and how the contract could be terminated. Parcel A argued that the contract was to continue in perpetuity and it was unfair for parcel B to attempt to terminate the contract in the face of a large anticipated expense. Parcel B argued that it had the right to terminate as it did or, in the alternative, on appropriate notice.
The Court noted that the law generally is that, in the absence of a termination provision, what notice is required to terminate a contract is a matter of considering the surrounding circumstances. However, the Court found that there was no right to terminate in the circumstances given that:
- there had been a post-incorporation of the contract and registration of the covenant on title consistent with the agreement continuing in perpetuity;
- the covenant had a reciprocal nature with both stratas having amenities located on their physical properties which were shared and used by members of both stratas;
- there was an obligation to Burnaby concerning the amenities the change of which Burnaby was not prepared to consent to unless similar or better amenities approved by both stratas were put in place.
The Owners, Strata Plan NW 2301 v The Owners, Strata Plan NW 2364 is very useful case for understanding the interconnectedness between positive covenants and the parallel contracts that can be created as a result. It is a reminder that, by their words and conduct, parties can create and affirm contractual relationships and create rights and obligations which may otherwise be prohibited by the Land Title Act such as positive covenants.
The foregoing was provided for information only. It was not intended nor should be construed as legal advice. Unless noted otherwise, this article only reflected the law in the subject case at the time the case was reviewed. As such, the information or caselaw referred to herein may no longer be current.
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