Canada: In Distinguishing Iona, The Court Of Queen's Bench Of Alberta Confirms The Sanctity Of The Torrens Registration System In Determining Priority Interests Even In The Face Of A Statutory Trust

In the recent decision of 1864684 Alberta Ltd. v 1693737 Alberta Inc., 2016 ABQB 371, the Court of Queen's Bench of Alberta held that purchasers claiming a statutory trust pursuant to section 14(3) of the Condominium Property Act, RSA 2000 c C-22 ("Condo Act") were subject to the same registration requirements, and priority regime, as other creditors under the Land Titles Act, RSA 2000 c L-4 ("Land Act").

The applicants in that case sought a determination of the various creditors entitlement to the net sale proceeds (the "Proceeds") from sale lands containing a commercial condominium development. The developer, 1693737 Alberta Ltd., (the "Developer") had collected deposits (the "Deposits") from a number of purchasers (the "Purchasers") pursuant to a purchase and sale agreement. Under section 14(3) of the Condo Act, the Developer was required to hold those monies in a separate trust account. Unfortunately, the Deposits were not placed into a separate account and instead were commingled with other monies that had been used to fund the construction of the condominium complex. During the development, a number of builders' lien and caveats were registered on title to the lands by various other creditors (the "Other Creditors"). The Purchasers never registered an interest on title.

The Developer was unable to complete the project, and a Receiver of the land was appointed. The land was subsequently sold pursuant to receivership proceedings (although the Developer itself was never assigned into bankruptcy). The net proceeds from the sale of the land were paid into Court. The issue before the Court was whether a trust claim advanced by the Purchasers had priority over the other registrations on title to the land.

The Other Creditors' position was that the Torrens registration system in Alberta created a comprehensive and definitive mechanism for evaluating the priority regime for interests in land. Consequently, the Other Creditors claimed that their interests registered on title to the land took priority over other unregistered claims. In contrast, the Purchasers sought to rely on the recent Alberta Court of Appeal decision of Iona Contractors Ltd v Guarantee Co of North America, 2015 ABCA 240 ("Iona"), to claim priority over the other registered interests under the Land Act. Iona had previously established that funds held by contractors pursuant to a deemed trust created by section 22 of the Builders' Lien Act, RSA 2000 c B-7 were excluded from the bankrupt's estate in insolvency proceedings.

The Court disagreed with the Purchasers and restricted the application of Iona, finding that it could not be relied on to advance the Purchasers' claim as that case had not addressed the land registry regime set up by the Land Act, nor had it discussed the priority of unregistered statutory trusts over registered interests in land. Instead, the Court focused on the purpose behind both the Condo Act and the Land Act, with the aim of achieving horizontal consistency between both statutes. The Court found that the Condo Act did not alter or modify the indefeasibility or priority regime provisions of the Land Act, because while the Condo Act expressly impressed a trust on deposit money, the trust was not imposed on the condominium property itself nor did it specifically exclude the operation of the Land Act.

In addition, the Court held that the Deposits ceased to be imposed with a trust when the Developer, in breach of the Condo Act, failed to hold them in a separate account. The Court concluded that since the Deposits were commingled with other monies used to fund the construction of the condominium complex they were no longer uniquely identifiable and had become inseparable from the other funds and activities that had added value to the land, including the work undertaken by the lien claimants. Consequently, the Other Creditors' registered interests in the Lands took priority over the Purchasers' unregistered interest.

Implications for Alberta Property Rights:

  • Developers cannot contract out of their duty to hold purchase funds in trust until a Certificate of Title is issued to the purchaser.
  • Title in registry is absolute proof of ownership. Purchasers should promptly register their interest in land.
  • Deposits should be kept separate from funds used to construct and improve the lands in order for the Condo Act to alter or modify priority regime provisions of the Land Act.
  • Alberta Courts are strictly applying Iona and we will likely continue to see it distinguished by the Courts when it is used to defeat priority regimes outside of insolvency or bankruptcy proceedings.

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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