The Equitable Trust Company v. The Lougheed Block Inc., 2011 ABQB 269

Court of Queen ’ s Bench of Alberta Citation: The Equitable Trust Company v. The Lougheed Block Inc., 2011 ABQB 269 Date: 20110419 Docket: 0901 08221 Registry: Calgary Between: The Equitable Trust Company Plaintiff - and - The Lougheed Block Inc., Neil John Richardson, Hugh Daryl Richardson and Heritage Property Corporation Defendants _______________________________________________________ Reasons for Judgment of K.R.

Laycock, Master in Chambers _______________________________________________________ [ 1 ] The Lougheed Block Inc. (The owner) owned a historic building in the City and wished to do substantial renovations to the building. The owner entered into an agreement with the City of Calgary called the Lougheed Building Rehabilitation Incentive Agreement (Incentive Agreement) which was registered against their title by caveat pursuant to the Historical Resources Act . The Incentive Agreement restricted the nature and extent of the permitted work on the building.

The City was to pay grant money to the owner as compensation for the restriction on development, with the payment spread over 14 years. [ 2 ] The property was mortgaged to the plaintiff, Equitable Trust Company, who took security for the loan including: a mortgage, an assignment of the leases and rents, an assignment of grant money payable under the Incentive Agreement, a general security agreement and personal guarantees. The owner defaulted in payments due under the loan.

[ 3 ] The plaintiff commenced an action to enforce some of its security. Included in this action is a foreclosure on the land mortgage and enforcement of the general security agreement. The statement of claim does not mention the assignment of the grant money. [ 4 ] The property was advertised for sale and in July 2010 the property was sold by court order. The purchaser argues that it is entitled to the remaining annual payments of grant money payable by the City.

The owner and subsequent encumbrancers object. [ 5 ] Firstly, the purchaser argues that the grant money was expressly or impliedly included in the assets sold. Secondly, it argues that it is entitled to the payment by the City as a result of the purchaser taking title subject to the Historical Resources caveat. Thirdly, it argues that the plaintiff assigned to it the assignment of the grant money and that it can collect pursuant to the assignment. Fourthly, the Incentive Agreement provides for a transfer of the grant money. Finally, it argues promissory estoppel.

Part of the assets sold: [ 6 ] The question was raised during argument about whether the court sold the owner’s entitlement to the future payment of grant money. The owner correctly argues that it was not referred to in the statement of claim. The plaintiff refers to its mortgage and general security agreement in the statement of claim and not its other collateral security. [ 7 ] Since the plaintiff was not seeking to enforce its assignment of the grant money, was the grant money an asset secured by the General Security Agreement (GSA)?

A copy of the GSA dated November 8, 2006 is attached as exhibit “D” to the plaintiff’s affidavit of default. In paragraph 1(

a) of the security agreement , the owner grants to the plaintiff a security interest “ in all of that property of the debtor described in

schedule “A”.

Schedule “A” defines the collateral as including “All present and after-acquired personal property of the Debtor located at or used in connection with the property located at 604 - 1 st Street SW Calgary, Alberta...” [ 8 ] In my view the future payment of grant monies by the City is not personal property “located at or used in connection with the property”. The future grant payments are not secured by the GSA.

Therefore if the purchaser acquired the secured assets covered by the mortgage and the GSA, the secured assets sold by the court did not include future payments of grant monies. [ 9 ] There is nothing in the order for sale granted by Master Mason on March 22, 2010 or the attached Judicial Sale Listing which indicates that the court intended to deal with or sell an interest in the grant money.

Additionally there is no mention of the grant money in the purchaser’s offer or the court’s acceptance of the offer. [ 10 ] Accordingly I cannot agree that the future payment of grant money was an asset sold by the court to the purchaser.

Restrictive covenant running with the land: [ 11 ] The purchaser, Allied Properties REIT Acquisition Corporation, argues that the City caveat remains registered on the property and it is entitled to the benefits and burdens contained in the Incentive Agreement. [ 12 ] The owner and the subsequent encumbrancer argue that the caveat filed by the City protects a restrictive covenant. They argue that only negative covenants or burdens can be included in a restrictive covenant and only negative covenants run with the land.

They argue that the benefit under the agreement, being annual payment of grants, cannot be the subject matter of a restrictive covenant, and therefore the benefits do not run with the land. They argue that the benefit is only a contractual right vested in the owner. It does not

create an interest in land and therefore is not transferable with an ordinary sale of the land. [ 13 ] In Preston & Newsom’s Restrictive Covenants 8 th Edition the author discusses covenants at page 1 and states: In the law of property the expression “restrictive covenants” is commonly used to refer to agreements restricting the user of land belonging at the date of the agreement to the covenantor, whether or not they are created by deed. Agreements are primarily enforceable between the original contracting parties.

But, if such an agreement is made for the benefit of land belonging at the date of the agreement to the original covenantee, it may also be enforceable, despite the absence of privity of contract, by future owners of the land and against future owners of the land of the covenantor. [ 14 ] The author proceeded to confirm that in order for covenants to run with the land, there must be an obligation or a restriction on the owner of the land of the covenantor which provides a benefit to the land of the covenantee and the original parties must have intended that the covenant run with the land.

The court would determine the intention of the parties by a review of the agreement. The inclusion of words such as “ for himself and his successors and assigns” would lead the court to conclude that the parties intended the covenant to run with the land. [ 15 ] This raises the issue of whether a contract containing a restrictive covenant can also include covenants which bestow benefits as well as burdens. Are positive covenants severable from the agreement such that only the burdens are interests in land and capable of being enforced against subsequent purchasers?

This issue is compounded by the fact that the agreement allows the City to set off grant payments against unpaid property taxes due and payable by the original owner and all subsequent owners . [ 16 ] In Potts v. McCann [2002]A.J. No. 999, 2002 ABQB 734 , Slatter J. (as he then was), in discussing negative restrictive covenants in Alberta, stated at para 24: The law of Alberta recognizes two types of negative covenants relating to the use of land that are capable of running with the land. The first type arises when a covenant is placed on a servient tenement for the benefit of a dominant tenement .

These types of covenants were first recognized in Tulk v. Moxhay (1848), 41 E.R. 1142 . The second type of covenant that runs with land arises when a building scheme is imposed over an area of land to regulate the development of that area. [ 17 ] The restrictive covenant in this matter does not fit within the traditional definition of restrictive covenants. There is no dominant or servient tenement and there is no building scheme involved here. [ 18 ] Canadian courts have held that positive covenants do not run with the land. See Westbank Holdings Ltd. v.

Westgate Shopping 2001 BCCA 268 ; Amberwood Investments Ltd. v. Durham CC No 123 (2002) 50 R.OP.R. (3 rd ) 1. [ 19 ] The plaintiff and the purchaser argue that since this is a case of a statutory scheme, the common law with respect to restrictive covenants will not determine the issue. It is a matter of what the legislature intended when it passed the Historical Resources Act RSA 2000 ch H-9,

section 29. The Incentive Agreement arises from the Historical Resources Act ,

section 28 and 29 which states: Compensation 28

(1) If a bylaw under

section 26 or 27 decreases the economic value of a building, structure or land that is within the area designated by the bylaw, the council shall be bylaw provide the owner of that building, structure or land with compensation for the decrease in economic value.

(2) If the council and the owner can not agree on the compensation payable under subsection (1), the owner or the council may apply to the Land Compensation Board established under the Expropriation Act to determine the amount of compensation payable by the council to the owner for the decrease in economic value.

(3) When an application is made to the Land Compensation Board pursuant to subsection (2), the Expropriation Act and the regulations made under it respecting the determination of compensation, hearings and procedures, including interest, costs and appeals, apply to the application with all necessary modifications.

(4) The council may, with the agreement of the owner, provide the compensation under subsection (1) by grant, tax relief or any other means.

(5) This

section does not apply with respect to a Municipal Historic Resource that is designated as part of a TDC scheme under the Alberta Land Stewardship Act . Condition or covenant on land

(1) A condition or covenant, relating to the preservation or restoration of any land or building, entered into by the owner of the land and (

a) the Minister, (

b) the council of the municipality in which the land is located, © the Foundation, or (

d) and historical Association that is approved by the Minister, may be registered with the Registrar of Land Titles.

(2) When a condition or covenant under subsection (1) is presented for registration, the Registrar of Land Titles shall endorse a memorandum of the condition or covenant on any certificate of title relating to that land.

(3) A condition or covenant registered under subsection (2) runs with the land and the person or organization under subsection (1) that entered into the covenant or condition with the owner may enforce it whether it is positive or negative in nature and notwithstanding that the person or organization does not have an interest in any land that would be accommodated or benefited by the condition or covenant. (Emphasis added) [ 20 ] On July 26, 2004, the City designated the Lougheed Building as a historic resource pursuant to the Act s. 26 .

Section 28(1) required the City to compensate the owner for the decrease in economic value. Pursuant to s. 28(4) an agreement was entered into which provided for compensation. In paragraph 4 of the

preamble of the Incentive Agreement it stated in part: The City wishes to pay the Owner money in satisfaction of any right to compensation the Owner may have pursuant to

Section 28 of the Act as well as for building Rehabilitation Work. The Owner agrees to accept such money as compensation in full for any monies that may be owing under

Section 28 of the Act as well as for Building Rehabilitation Work. [ 21 ] The agreement did not just deal with the compensation payment, it also dealt with matters contemplated in s. 29. [ 22 ] Section 29(1) allows the owner and the council of the municipality to enter into a condition or covenant relating to the preservation or restoration of the building which would be registered at land titles. Subsection 2 requires the Registrar of Land Titles to endorsed a memorandum of the condition or covenant on the owners certificate of title.

Rather than submitting the conditions and covenants to the Registrar, the City filed a caveat on the title and attached a copy of the Incentive Agreement. That agreement covered

matters of s.28 compensation and s. 29 restrictive covenants. Filing the caveat with the Incentive Agreement attached rather than filling just the restrictive covenants has resulted in the present dispute. [ 23 ] Paragraph 8.3 of the Incentive Agreement states: Pursuant to and in accordance with

Section 29 of the Act, this Agreement shall be registered by caveat on title to the Lands and the conditions and covenants shall run with the Lands and shall bind the Owner and subsequent owners and successors in title to the Owner. [ 24 ] The agreement entered into between the City and the owner contained positive covenants in paragraph 3 which required the owner to perform specified work such as the repair and restoration of the original facades.

If all the required positive covenants specifying the work that must be done was not completed within 4 years, the City could complete the work and deduct the cost from the incentive payment. [ 25 ] The City agreed to make an incentive payment to compensate for the decrease in economic value in paragraph 4 and 5 of the agreement. Paragraph 4 deferred any payments until after the rehabilitation work was complete. Paragraph 5 obliged the City to pay the Owner a maximum incentive of $3,400,000.00 by 14 yearly installments.

Paragraph 5.3 allows the City to set off the amount of unpaid property taxes against any incentive payments owing. [ 26 ] Paragraph 5.4 of the agreement makes the incentive payments conditional upon “The Lougheed Block Inc.” being the registered owner of the land at the time of the passage of the designation bylaw and up to and including the completion of the rehabilitation work. [ 27 ] Paragraph 8.3 of the agreement states: Pursuant to and in accordance with

Section 29 of the Act, this Agreement shall be registered by caveat on title to the Lands and the conditions and covenants herein shall run with the Lands and shall bind the Owner and subsequent owners and successors in title to the Owner. [ 28 ] The plaintiff and the purchaser argue that the positive (paying grant money) and negative (restricting development) covenants are to run with the land in accordance with the agreement and pursuant to s. 29 of the Act.

The owner and ths subsequent encumbrancers argue that the payment of annual incentive benefits is a contractual term only and payments must continue to be made to The Lougheed Building Inc. [ 29 ] Contract law dictates that only the parties to a contract may enforce the provisions of the contract. Without more, The Lougheed Building Inc. is entitled to the future incentive payments. As noted above, the law of property allows some covenants to be enforced by and against subsequent interest holders.

Also as noted above this is not a contract that would be governed by the law of property relating to restrictive covenants. [ 30 ] The plaintiff and purchaser argue that the purchaser is entitled to the payments based on the Historical Resources Act s. 29.

The plaintiff and the purchaser rely upon the provision of the agreement paragraph 8.3 which allows the agreement to be “registered by caveat and the conditions and covenants shall run with the Lands and shall bind the Owner and subsequent owners...” [ 31 ] The plaintiff and the purchaser argue that s. 29(3) specifically allows the condition or covenant to run with the land and allows a s. 29(1) party to enforce both positive and negative covenants. [ 32 ] The owner and subsequent encumbrancers respond that s.29(1) limits the condition or covenant that can be registered at Land Titles to conditions or covenants relating to the preservation or restoration of the building.

The legislation is intended to authorize the s. 29(1) parties to register and enforce covnenants relating to the preservation or restoration of the building only. The legislation never

intended this

section to be used to take away the damages payable by the City to the owner for imposing the historic restrictions on the owner. [ 33 ] Secondly, the owner and subsequent encumbrancers argue that the payment of money by the city to the owner is not a positive covenant referred to in s. 29 (3). They argue that the plaintiff and purchaser misunderstand the nature of negative and positive covenants. An example of a negative covenant is where the owner shall not do something, i.e. the owner shall not change the exterior brick facade.

A positive covenant requires the owner to do something i.e. the owner shall paint the crown moldings pink. [ 34 ] The owner and subsequent encumbrancers argue that the s.29 conditions and covenants that run with the land are obligations of the owner or subsequent owners to do, or not to do, certain things in order to protect the historical significance of the building. They argue that the obligation of the City to pay compensation is not a condition or covenant that relates to the preservation or restoration of the building.

Furthermore s. 29 of the Act does not deal with the obligations of the City to do anything. The City’s obligation to pay is contained in s. 28 and is a contractual obligation only. The incentive agreement states in the

preamble para. 4 that the purpose of the payment is to pay money to satisfy the compensation rights under s. 28 and to pay for rehabilitation work that the owner must perform. [ 35 ] I agree with the owner and the subsequent encumbrancers. The scheme of the Act is to require the City to compensate the owner of the property at the time when the land or building is designated a historic resource. It is that owner who has suffered the loss of economic value. Subsequent owners acquire title knowing of the historic resource designation and the impact it has on the value of the property.

The owner at the time of the designation has suffered the loss of economic value. The fact that the City has decided to pay the compensation over time does not transfer the future payment to future owners. The secondary purpose of the payment was to compensate the owner for rehabilitation costs.

This is evidence of the intention of the parties that the grant payment was purely a contractual benefit to be bestowed on the owner. [ 36 ] Furthermore, para 4.5 of the agreement restricts the payment of the incentive to “The Lougheed Building Inc.” Compensation will only be paid if that company is still the owner when the rehabilitation is complete. If they do not remain the registered owner during the entire period, the City does not have to pay a penny.

No benefit would flow to a subsequent purchaser. [ 37 ] Paragraph 8.3 of the agreement, which states that “the conditions and covenants herein shall run with the Lands”, only repeats and reaffirms the statutory rights created by the provision of s. 29(1) and (3) of the Act . No new rights or benefits are bestowed on the owner or subsequent owners. [ 38 ] Admittedly the agreement allows the City a right of set off for unpaid taxes and that is a potential problem for the owner and the purchaser if the purchaser defaults in future tax payments and the city claims a right of set off.

A new lawsuit may arise involving the owner, the City and subsequent owners, but that is not an issue for me today. The City may or may not have a right to use the set off clause to deprive the owner of the balance of its compensation where a subsequent owner defaults in paying taxes. [ 39 ] I am not convinced that the statutory provisions of the Historical Resources Act take away the owners contractual right to the future payments.

Successor and Assigns [ 40 ] The plaintiff and the purchaser argue that the Incentive Agreement expressly makes the agreement binding on the contracting parties and their successors and assigns. However, the purchaser is not an assignee of the grant money with the consent of the owner. That right lies with the plaintiff.

Black’s Legal Dictionary Fourth Edition defines successor in part as: Term with reference to corporations, generally means another corporation which, through amalgamation, consolidation or other legal succession, becomes invested with rights and assumes burdens of the first corporation. [ 41 ] The purchaser is a stranger to the owner and is not a successor in title to the owner. It is merely a subsequent owner of the

property. The purchaser can not claim the grant money on this basis. Receiver-Manager Order [42] The plaintiff and the purchaser point out that the owner consented to a court order the appointment of a Receiver of the landand the powers of the Receiver included the power to receive the grant money and apply it to the mortgage debt. The Receiver laterbecame a Receiver Manager pursuant to a later order and grant money was received by the Receiver and paid to the plaintiff. [43] The owner’s consent to the order is being used as the basis of an estoppel argument.

However the owner may have consentedto the order having regard to the fact that the plaintiff had a right to enforce payment of the grant money by use of its collateral security.Or the owner may have consented because it wanted the money to be credited against the mortgage account during the foreclosure. Theowner may have a different intention now that the property has been sold. [44] The Supreme court of Canada in Maracle v. Travelers Indemnity Co. Of Canada (SCC), [1991] 80 D.L.R. (4th) 652 had this to say about estoppel at page 656: The principles of promissory estoppel are well settled.

The party relying on the doctrine must establish that the other party has, by wordsor conduct, made a promise or assertion which was intended to affect their legal relationship and to be acted on. Furthermore, therepresentee must establish that, he acted on it or in some way changed his position. [45] The purchaser cannot rely upon estoppel because there is no evidence that the owner made any promise or assertion to the purchaser. The plaintiff cannot rely upon estoppel because there is no evidence that the ownermade a promise or assertion intending to affect their legal relationship.

The plaintiff was entitled to receive the grant money pursuant toits assignment of the funds. The plaintiff has certainly never changed its position as a result of the owner consenting to the receiver orreceiver manager order. Therefore, neither the plaintiff nor the purchaser can rely upon the principles of promissory estoppel. Assignment of Grant Money: [46] The owners assignment of grant money to the plaintiff was collateral security given by it to the plaintiff to secure the paymentof the loan amount.

The purchaser testifies that it, in turn, obtained an transfer of the assignment of grant money from the plaintiff. Butthere is no evidence of consideration paid for the transfer of the assignment. Arguably the plaintiff must assign not only its security butthe debt, or a portion of the debt. [47] Until the plaintiff transferred or gave away its assignment of the grant money, the plaintiff could have stepped into the ownersshoes and received the grant money, upon serving a copy of the assignment upon the City.

The grant money would be paid to theplaintiff until the debt was repaid. [48] A creditor may sell its loan agreement but typically the creditor assigns all of its security. It may be possible to transfer or sellpart of the debt obligation and transfer a portion of the security or enter into an agreement on a proportionate sharing of the debt and thesecurity. Once the assignment is further assigned to the purchaser, and if the City pays grant money pursuant to the assignment, the grantmoney must be credited against the original debt or the assigned debt.

It would be illogical to suggest that the debt remains unchanged.Arguably if the plaintiff did not assign its debt, or a portion of the debt, the transfer of the collateral security to the purchaser isunenforceable. [49] How effective is the transfer of the collateral security if the plaintiff’s debt has been fully paid? Clearly if the debt is paid, theplaintiff must return or discharge its security. There is a suggestion in some of the briefs that, as a result of the decision of MasterHanebury in this action found at 2011 ABQB 193, the plaintiffs debt is repaid.

A transfer of the collateral security to another party whenthe debt is repaid would render the transfer unenforceable.

[ 50 ] Consider what happens if a guarantor pays the balance of funds due on the loan agreement. The guarantor would be entitled to a discharge of all the security or an assignment of all the security. If the lender is unable to transfer all the security to the guarantor, the guarantee may be unenforceable. By assigning the collateral security, has the lender released the guarantor from his guarantee? One must examine the law of guarantee and the guarantee itself to answer this question.

And that issue must be reserved for another day. [ 51 ] Since the collateral security is only security for the debt and the debt has not been transferred, the transfer of the collateral security is ineffective and can not be relied upon by the purchaser. Effectively there was no consideration paid for the transfer of the collateral security and it is unenforceable by the purchaser. Conclusion [ 52 ] The City entered into a contract to pay money to the owner. For the reasons given, I reject the purchasers arguments that it is entitled to payment to the grant money.

The owner asks for and is entitled to a declaration that the incentive payments arising from the Lougheed Building Rehabilitation Incentive Agreement are not a interest in land and do not form part of the assets sold to the purchaser. The parties may speak to costs. Heard on the 15 th day of November, 2010. Dated at the City of Calgary, Alberta this 18 day of April, 2011. K.R. Laycock M.C.C.Q.B.A. Appearances: Francis Price Q.C. Reynolds Mirth Richards & Farmer LLP For the Plaintiff Neil John Richardson for the Defendants Brent Mainwood Mainwood Legal Services for Heritage Capital Corporation

Russell Avery and Shanna Hunka Bishop & MacKenzie LLP for the purchaser Allied Properties REIT Acquisition Corporation Brent Mescall Parlee McLaws LLP for Krayzel Corp.