Under the Property Transfer Tax Act, RSBC 1996, c 378, (the "Act"), property transfer tax ("PTT") would, generally speaking, be imposed on a lease with a term of 30 years or more, or a lease in conjunction with lease modification agreements that would result in a cumulative term of 30 years or more, would be subject to PTT under the Act. In the recent decision of M&N Hewitt Enterprises Ltd. v. British Columbia, 2021 BCSC 93 ("M&N Hewitt Enterprises"), the British Columbia Supreme Court addressed the question of when PTT would be imposed on a lease.
More specifically, M&N Hewitt Enterprises addresses a situation where two consecutive leases on the same property are granted by a lessor to a lessee. In such a case, would the respective terms of each lease be added together to reach or exceeded 30 years, rendering the leases subject to taxation?
Section 2(1) of the Act imposes PTT on "taxable transactions". The Act includes as taxable transactions leases with a term that exceeds 30 years, including lease renewals. Once an application is made to the Land Title Office to register the lease, the transferee is to pay the taxing authority PTT calculated on the fair market value of the property. The term is determined both from the original lease and any subsequent lease modification agreement that extends the term.
Prior to M&N Hewitt Enterprises, the question of what sort of leases would fall within this definition of "taxable transactions" was addressed once in 2005, in Ford Motor Company of Canada v. British Columbia, 2005 BCSC 1417 ("Ford Motor"). There, the Court found that a lease, in conjunction with two extension agreements that, altogether, extended the lease term beyond 30 years, was in fact subject to the PTT. Effectively, the Court decided that the lease term is to be calculated by reading all the leases together, to determine holistically the total number of years for which the lessee has the right to occupy the property.
M&N Hewitt Enterprises
In M&N Hewitt Enterprises, the same question is addressed, but interestingly with a different outcome based on a narrow distinguishing factor.
As background, in M&N Hewitt Enterprises, the tenant leased the premises since 1976. First, the tenant and the landlord negotiated a lease commencing in 1976 and a corresponding modification in 1986, set to expire in 2001 for a total term of 25 years. In 1998, the tenant and the landlord renegotiated the lease, adding new terms and increasing the rent. They discharged the original lease and registered the new lease in the Land Title Office. The term of this second lease was 13 years and three months.
The taxing authority determined that the second lease should be considered an extension of the original lease, thus extending the term beyond 30 years. Accordingly, the petitioner was assessed PTT on the "new lease". The tenant appealed this decision, arguing instead that they were two separate leases, and as neither lease exceeded 30 years, the tenant should not have been taxed under the Act.
The Court allowed the appeal of the taxing authority's decision. The Court pointed to the definition of "lease modification agreement" in making its decision and in particular, that a lease modification agreement should extend the term of the original lease. The Court determined this was not the case on the facts, as the new lease replaced the original lease. Specifically, as the new lease provided new rights that are materially different from those in the original lease (such as the increase in rent and a new right to terminate the lease), the parties effectively agreed to terminate the original lease and begin a new and separate lease.
The facts were differentiated from those in Ford Motor, wherein the extension agreements expressly provided that they were additions to the original lease. As the original lease had not been terminated as a result, the terms of each agreement were to be added together to exceed 30 years.
The Court will not solely consider the length of occupancy of the property by the tenant. Instead, it will look to the specific terms of the agreements in deciding if they can be considered one lease, or several shorter leases. In light of this, extra care can be taken when drafting new leases that could extend a lease term beyond 30 years – consider whether you are merely extending the term of the original lease, or if you are changing the terms sufficient to effectively replace the original lease.
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.