Canada: The Reincarnation of Top Line - The Dangers of Leasing a Portion of Un-subdivided Land

Last Updated: November 30 2010
Article by Andrew P. Prior

Focus on Real Estate - November 2010

A recent case from the British Columbia Court of Appeal confirms that leases of un‐subdivided land may be unenforceable depending on the date they were executed. In Idle‐O Apartments Inc. v.Charlyn Investments Ltd. 2010 BCCA 460, the Court of Appeal considered the enforceability of a lease of land for residential and recreational purposes. Idle‐O focused on the legislative response in May 2007 (adding section 73.1 to the Land Title Act R.S.B.C. 1996, c.250 (the "LTA")) to the Court of Appeal's decision in International Paper Industries Ltd. v. Top Line Industries Inc.(1996), 20 B.C.L.R. (3d) 41 ("Top Line").

In Top Line, the Court confirmed that s.73 of the LTA rendered leases of un‐subdivided land for a term exceeding three years unenforceable. The effect of the Top Line decision allowed either party to a non‐conforming lease to walk away from any continuing obligations to the other party. Understandably, this caused some concern within the leasing industry.

Top Line held that the purpose of s.73 was to ensure that municipal authorities retained control over the subdivision of land. However, by allowing one party to, in essence, terminate a lease without notice, Top Line's interpretation ofs.73 had the potential to provide a windfall to one of the parties to the lease.

Section 73.1 of the LTA was inserted to address this potential hardship. 73.1 provides as follows:

1) A lease or an agreement for lease of a part of a parcel of land is not unenforceable between the parties to the lease or agreement for lease by reason only that

  1. the lease or agreement for lease does not comply with this Part, or
  2. an application for the registration of the lease or agreement for lease may be refused or rejected.

2) This section does not apply to an airport lease, as defined in section 41 of the Municipalities Enabling and Validating Act(No. 2).

When the LTA was amended to insert s.73.1, the explanatory note accompanying the amendment confirmed that the purpose of the amendment was to abrogate the reasoning in Top Line.

However, the Court of Appeal in Idle‐O had to consider whether s.73.1 applied retroactively to those leases entered into before s.73.1 came into force or whether Top Line would continue to apply to older leases. In Idle‐O, the lease in question was for an un‐subdivided portion of land on the western shore of Osoyoos Lake in the interior of British Columbia. The lease was entered into for 99 years in 1974 and was amended to extend the term to 998 years in1978. The land had been continuously occupied since 1966 by the principals of the respondent (the lessees), both for their personal and family use.

Since leasing the portion of land, the respondents built four cottages and then in 1999 commenced construction on a two‐storey building. It appears that construction of the two‐storey building led to a dispute as to whether consent was required from the lessor (the appellants). The lessor ultimately refused to consent to the construction of the building and in June 2000 advised the lessee that the lease was invalid and unenforceable as a result of s.73 of the LTA. The lessor demanded that the lessee deliver up possession of the leased land. The lessee understandably refused to do so.

An action was commenced on May 27, 2004 and after a series of delays, the case proceeded to summary trial in June of 2006. Judgment was reserved and by May 2007, the LTA was amended to add s. 73.1. As a result of the amendment, the parties reappeared to make further submissions to the trial judge and reasons were ultimately released on June 30, 2008. The trial judge concluded that the lease was valid on the basis that the amendment to the LTA to add 73.1 was retrospective in application and that its effect was to validate the lease.

In overturning the decision of the trial judge, the Court of Appeal applied a well‐known principle of statutory interpretation – that in the absence of express language applying the legislation retroactively, legislation will not be construed to act retroactively unless required to give effect to the language of the legislation. Since s.73.1 did not expressly state that it was to apply retroactively, and since retroactive interpretation was not necessary to give effect to the section, the Court of Appeal concluded that s.73.1 could not validate leases entered into before May,2007.

The ramifications of Idle‐O on real estate in British Columbia (both commercial and residential) are significant, although admittedly only applying to those leases entered into before May 2007. If the lease for an un‐subdivided portion of a larger parcel of land is entered into before May 2007and has a term of more than three years, that lease will be invalid and unenforceable as between the parties. Accordingly, parties looking to enter into transactions involving leases of land, including the purchase of companies whose major assets rely on commercial leases, need to carefully review the leases to consider whether there is a risk that the leases could be terminated without notice and recourse.

Notwithstanding the impact of s.73 and Top Line on leases of un‐subdivided land entered into before May 2007, it should be noted that an important question was remitted to the trial judge in Idle‐O by the Court of Appeal which may militate against some of the punitive effects of the section. In Idle‐O, the lessee had sought alternative relief – declarations that there were irrevocable licenses to use the property or, alternatively, trust rights arising from the historical use of the lands. Although the appellant suggested that those claims were rejected in Top Line and therefore ought not to be remitted back to the trial judge for determination, the Court of Appeal determined that the matters ought to be fully adjudicated. Accordingly, although nonconforming leases entered into before May 2007may be unenforceable; it might be open to a party to argue other rights arising from historical use.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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