Friday, February 7, 2014

Purchaser's Liens - A Summary

In a recent case out of the Supreme Court of BC, Pan Canadian Mortgage Group Inc. v. 679972 B.C. Ltd.,2013 BCSC 1078, the Honourable Madam Justice M. Koenigsberg provided an excellent summary of the nature of a Purchaser's Lien in dismissing the assertion of Judgment Creditors that they had priority.  The following text from pages 19 to 22; I have highlighted what I consider a few salient points:

 "What are the Essential Features or Requirements for a Purchasers Lien?

[90] A purchasers lien is a well-established equitable charge over property that arises at the time a purchaser of property provides a deposit or funds to the vendor or their agent in part or whole payment of the purchase price. A purchasers lien is created by equity not by contract. The law establishing a purchasers lien has a long history stretching from at least the mid-1800s to today. A case similar to the one at bar is Whitbread & Co., Limited v. Watt, [1902] 1 Ch. 835 at 838. In this case the purchaser was purchasing a freehold public-house plot on a building estate. The purchase was to complete as soon as 300 houses had been built on the estate. The 300 houses were not built. The purchaser sued for a return of their monies based upon a purchasers lien. Lord Justice Vaughan Williams stated at 838:
The lien which a purchaser has for his deposit is not the result of any express contract; it is a right which may be said to have been invented for the purpose of doing justice. ...

[91] One of the first cases to discuss purchaser's liens is the oft cited case of Rose v. Watson, [1864] 10 H.L.C. 672. The House of Lords found that when a portion of the purchase price for property was paid the payor obtained a security interest, similar to that of a mortgagee, equivalent to the funds paid. Lord Westbury stated at 682:
.... It was money advanced upon the faith that the land, the subject of the contract, would become the property of the Respondent; and being so paid as part of the purchase-money under the contract, and being paid in advance, on the faith of the vendors performance of the contract, I think that your Lordships will have little difficulty in coming to the conclusion that those sums of money thus paid formed principal sums, in respect of which there became a lien from the time of the payment of them; ... [Emphasis added]

[92] As stated by Di Castri in the Law of Vendor and Purchaser, 3rd edition, Volume 3 at para. 913, p. 18-20:
... The lien is decreed independently of the contract, which does not give it, but furnishes the reason for the decree. ...

[93] At the time any payment on account of the purchase price is made, a purchaser obtains an equitable right to security in the land to the extent of their payments. This right is immediately vested to secure repayment of the purchase monies so paid in the event the contract is not completed through no fault of the purchaser. (Whitbread; Rose; Capital Plaza Developments Ltd. v. Counterpoint Enterprises Ltd., [1985] B.C.J. No. 321 (S.C.) at paras. 9-11).

[94] Put another way, the courts have found that the payment on account of the purchase price (whether as a deposit or otherwise) is not just a partial payment but is security for the completion of the purchase. If the purchaser fails to perform their part of the contract, the vendor has security against the funds; if the vendor fails to perform, the purchaser can recover the funds and is entitled to a lien on the subject matter of the contract. By virtue of the lien the purchaser is a secured creditor. (Levy v. Stogdon, [1898] 1 Ch. 478 (C.A.) at 486; J.A.R. Leaseholds Ltd. v. Tormet Ltd. and Kaye (1965), 48 D.L.R. (2d) 97 (Ont. C.A.))

[95] Di Castri has described the nature of a purchaser's lien at (Law of Vendor and Purchaser, 3rd edition, Volume 3, at para. 913, pp. 18-20):
Where a contract goes off without any misconduct or default on the part of the purchaser, he acquires an equitable lien, on the subject land, in general commensurate with the purchase money paid. To put this another way, in order to do justice between a vendor and a purchaser under a contract for the sale of land, equity gives the latter a lien on the estate by way of an equitable charge in respect of all payments made on account of the price, interest, and costs.
While there is no doubt that an action to enforce a purchasers lien is based on an affirmance of the contract, there appears to be some technical legal question as to the affirmative right of a purchaser to claim his lien, where he has rescinded the contract. It is submitted, however, that whether the transaction falls through by reason of the inability of the vendor to convey as agreed or whether the contract is rescinded before completion by reason of the vendors misrepresentation of a material fact, in either event, the purchasers right to a lien cannot be affected. The objection is urged that, assuming the right of a purchaser to a lien, it is abandoned where the contract is rescinded. The argument is that
In order to ascertain the real nature of the exercise of equitable power, it may be considered in relation to its basis and to the result of its operation. The basis is the promise of the vendor to convey the land, as and when agreed, and that meanwhile he is a trustee of the legal title for the purchaser to the extent of the purchase moneys paid. The extent of its operation is to subject the land to the execution of a trust, either to convey, where there has been full performance by the purchaser or to return him his moneys, where the contract has failed and ceases to be binding through no fault of the latter. It supplies a remedy where the law falls short of accomplishing full justice. If equity lays hold of a pretext, or adopts a fiction, in such a case it is not more than it does in many other cases, in order to enforce a natural right and to affect a just result.

[96] The enforcement of a purchasers lien can be sought when there is no ability to enforce specific performance or where the purchaser does not want specific performance. If specific performance is available to a purchaser title can be transferred or the purchaser can elect to claim under the purchaser's lien. In the circumstances where specific performance is not possible, the purchasers equitable interest in the land remains which is enforceable through the lien. (Rose; Levy; Cornwall v. Henson, [1899] 2 Ch. 710 at 714; Law of Vendor and Purchaser,
3rd edition, Volume 3, at para. 919, pp.18-26; J.A.R. Leaseholds Ltd. at para. 28).

[97] The court found that upon paying the monies the purchaser obtained a purchasers lien over the property as a whole (Whitbread). The principle that the lien will apply to the property as a whole rather than to the particular portion of the property for which the funds were advanced was reiterated in the British Columbia case of Lehmann v. B.R.M. Enterprises Ltd. (1978), 88 D.L.R. (3d) 87 (B.C.S.C.). In this case the plaintiff was the purchaser of a strata unit in a planned strata development. He had paid the entire purchase price for the unit to the vendor. The vendor went bankrupt and did not complete the development and did not file a strata plan. The court found that the right to the purchasers lien was not affected by the fact that the strata plan had not been registered. The right to the lien was not dependent upon the ability of the vendor to convey title and the purchaser was entitled to a lien over the entire development property for the amount paid notwithstanding that the lands that were the subject of the contract did not exist and specific performance could not be ordered."

Justice Koenigsberg applied this equitable principal to find in favour of the parties who registered purchasers liens.  It is a powerful remedy which arises in any circumstance when a purchaser pays money on a condominium project which is not completed. Developers often try to control this dynamic by providing in the purchase and sale agreement that a purchaser may not register a Caveat/Lien to protect money which has been paid to the Developer prior to the development occurring.  This failure to register can be fatal and it is suggested that purchasers should not agree to such limitation.

The purchasers lien also arises under what is referred to as an Agreement for Sale (this is distinct from an Agreement to Sell).  In this circumstance a purchaser provides money against the purchase price and continues to make payments until the full purchaser price is paid.  The title to the property subject of the sale remains in the name of the vendor and the vendor is not obliged to transfer the property to the purchaser until all payments are made.  In Alberta our Law of Property Act imposes upon vendors the obligation to commence a foreclosure in the even that a purchaser breaches an Agreement for Sale.  This statutory requirement prohibits vendors from being unjustly enriched.  The property subject of the sale will as part of the foreclosure be required to be sold and the monies paid by the purchaser are contemplated by the Court in establishing the redemption period which proceeds the Court ordered sale.  The money paid by the purchaser forms an equitable interest in the subject property and is only forfeited to the vendor and the Agreement for Sale extinguished upon completion of the foreclosure action.