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Always Assume – Positive Covenants Do NOT Run with the Land – Updated

 

Always Assume – Positive Covenants Do NOT Run with the Land

By: Russell Benson, Terra Law Corporation, October 23, 2017 – Updated May 9, 2019

Two cases decided within the past year by the British Columbia Supreme Court reinforce the absolute necessity of ensuring that positive covenants contained in registered easements are assumed by a strata corporation created by the deposit of a strata plan in respect of the dominant or servient tenement or, for that matter, when ownership of an un-stratified parcel that benefits from or is burdened by such an encumbrance is transferred. In both cases, a party to the easement was excused from its obligation to comply with cost-sharing provisions in the document because there was no privity of contract between the parties to the easement, and because positive obligations (such as the obligation to pay money) do not automatically run with the land to bind future owners.

In The Owners, Strata Plan LMS3905 v. Crystal Square Parking Corporation, 2017 BCSC 71, an easement was registered over and in favour of the various parcels comprising a large mixed-use complex in the Metrotown area of Burnaby, British Columbia. The plaintiff residential strata corporation was formed by the deposit of a strata plan in respect of one of the airspace parcels comprising the complex. The easement required the plaintiff strata corporation to contribute to the costs of operating the parking facility, in return for which it received 76 parking passes entitling the holders to use parking spaces on a first-come, first-served basis. The plaintiff sought an order that the cost sharing obligations were unenforceable, while the defendant counterclaimed for approximately $600,000 in outstanding contributions.

The court reviewed the fundamental nature of an easement, noting that an essential characteristic is that it does not place on the owner of the servient tenement any obligation to act (i.e. a positive obligation). Relying on the Supreme Court of Canada’s decision in Heritage Capital Corp. Equitable Trust Co., 2016 SCC 19 (which, in turn, cited British authority from 1885), it affirmed the general rule that positive covenants do not run with the land to bind future owners, on the principal “that at common law a person cannot be made liable on a contract unless he or she was a party to it”. The court found that the payment obligations under the easement were positive covenants created before the plaintiff strata corporation existed and, importantly, that the plaintiff never entered into a contract to assume those obligations. It also found that a clause in the easement that purported to bind successors to positive covenants is unenforceable, based on the Ontario Court of Appeal’s decision in Amberwood Investments et. al. v Durham Condominium Corporation No. 123 (2002), 58 OR (3d) 481 where the court stated: “it is undisputed…that the rule…governs despite any express intention to the contrary contained in the agreement.”

The court then considered two exceptions to the general rule developed by English courts and discussed in the Amberwood decision: the “conditional grant” exception (i.e. where performance of the positive obligation is a condition of enjoying the benefit of the easement), and the so-called “benefit and burden” rule (i.e. where there is an implicit and necessary connection between the positive obligation – the burden – and the benefit). However, the judge concluded that neither exception has been adopted in Canada and confirmed that “the law is still that positive covenants do not run with the land.”

The defendant argued that the easement should be binding on the strata corporation as a pre-incorporation contract, because it contemplated that a strata corporation would be formed to take the benefit and burden of the agreement. After reviewing the applicable cases, the court held that the requirement of a valid pre-incorporation contract – that the parties’ conduct must establish an intention to be bound through a new contract containing identical terms – did not exist here. Various other ancillary arguments advanced by the defendant, including that the strata corporation had acquiesced to being bound by complying with the easement’s terms over a number of years, were also rejected. In the result, the court ordered that the payment provisions were not enforceable against the plaintiff strata corporation. (Note: This decision has been appealed to the British Columbia Court of Appeal.)

The Owners, Strata Plan NWS 3457 v. The Owners, Strata Plan LMS 1425 (2017 BCSC 1346) was decided only seven months after the Crystal case. Two adjacent strata developments in Surrey, British Columbia, known as Scottsdale Village and La Costa Green, shared recreational facilities located on the common property of the plaintiff strata corporation. A recreational facilities easement was registered by the developer against the parent parcel that became Scottsdale Village in favour of the parent parcel that became La Costa Green. The easement gave La Costa Green owners and occupants the right to use the recreational facilities on the Scottsdale Village common property, and required the owners of both parcels to share in maintenance and repair costs proportionately based on the number of strata lots in each development. For approximately 20 years, the two developments shared the use and the costs of the recreational facilities, with Scottsdale Village establishing a budget and paying the costs, and La Costa Green paying it’s 59% share upon receiving a monthly invoice.

However, when disputes arose regarding the condition of the recreational facilities, La Costa Green notified Scottsdale Village that it wished to withdraw from the arrangement. Scottsdale Village advised that it did not accept the withdrawal, and commenced legal action for a declaration that the terms of the easement were binding and an order that La Costa Green pay amounts owing under it.

The court’s reasons closely followed those of the court in the Crystal case, considered the same basic case law, affirmed the general common law rule and again found that the two exceptions mentioned in Amberwood do not apply in Canada. Scottsdale Village also put forward the pre-incorporation contract argument, as well as submitting that a section 219 (Land Title Act) covenant in favour of the City of Surrey included in the recreational facilities access easement entitled Scottsdale Village to rely on La Costa Green’s positive covenant to pay. Neither was successful and the court ultimately held that the positive covenant to contribute to the costs of the recreational facilities was no longer enforceable.

It is standard practice to ensure that unregistered agreements, like leases and service contracts, are assigned and assumed when a purchase or sale transaction completes. However, it is almost natural to think that if an agreement, such as an easement or covenant, is registered on title to the subject property, then the obligations automatically bind the purchaser or, where a strata plan is deposited, the resulting strata corporation. This is true with respect to section 219 covenants which, by statute, can be positive or negative in nature and still bind successors, and also applies to the burden of private easements or valid private restrictive covenants. However, the two cases summarized here highlight the need for a written agreement by which the strata corporation, or a successor in title in the case of a purchase and sale transaction, assumes all positive obligations in any easements or other registered encumbrances. Failure to do so could well leave the party seeking to enforce the positive obligation – including an obligation to contribute pursuant to cost-sharing provisions – without recourse.

[UPDATE: The Crystal Square decision was appealed by the unsuccessful defendant and the Court of Appeal’s judgment was issued on May 8, 2019 (2019 BCCA 145). The appeal was heard in conjunction with the appeal from The Owners, Strata Plan BCS 4006 v. Jameson House Ventures Ltd., 2017 BCSC 1988 which was issued by the same panel on the same date (2019 BCCA 144). The Court relied on its own decision in Jameson House in which it comprehensively reviewed the law on positive covenants and confirmed that they do not run with the land and thus denied the defendant’s appeal. However, the Court in Crystal Square also reviewed the law relating to pre-incorporation contracts, identified errors in the trial judges analysis and determined that the easement agreement, though entered into before the strata corporation was formed, was a valid pre-incorporation contract binding the strata corporation because its terms were discernable, consideration (in the form of the parking passes) flowed to the strata corporation and the strata corporation exhibited an intention to be bound by the terms through its conduct (i.e. accepting the parking provided and paying the fees for years, exercising certain rights under the easement agreement, adopting a portion of the easement into its bylaws, stating that the easement agreement must be complied with and, suing on the easement agreement). A formal adoption of the easement agreement was not found to be necessary as a result of this conduct.
It is important to note that the favourable result (for the original defendant) in the Crystal Square appeal) was very much dependent on the facts. The whole dispute, and the need to hope that the facts turned out favourably, could have been avoided had the original developer simply caused the strata corporation to enter in to an agreement to assume the positive obligations in the easement agreement.]


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