Sunday, October 24, 2010

The Continuing Saga of Top Line

I live and work in the Okanagan Valley, in British Columbia. There are orchards up and down the valley: apples, pears, peaches and grapes among other fruits. Most of the orchards are small. People buy houses on orchards. Many don’t want to actually farm the orchards. They have jobs in town, or are retired. But they want the rural or semi-rural lifestyle of living among the fruit trees.

What do you do if you want to live on an orchard property, but don’t want to actually farm it? One solution is to lease the orchard portion of your land to someone else to farm it. You can enjoy living on an orchard, while someone who has the knowledge and ability to productively farm the land may do so. The lease will likely need to be long-term to make it worthwhile for the tenant to make the investments required to operate an orchard.

Sounds like a win-win solution, right? I don’t know how many leases of the orchard portion of land there are in the Okanagan, but I am guessing that there are quite a few. I have certainly seen some. It is hard to imagine anything illegal about it.

Now, let’s go from farming to recycling, the business that a company called International Paper Industries Ltd. was in. International Paper Industries Ltd. leased a building and a portion of a parcel of land from Top Line Industries Inc. The lease was for a five year term, and the tenant had the option to renew the lease. A dispute arose between International Paper Industries Ltd and Top Line Industries Inc. The landlord took the position that the lease was invalid, and the case ultimately ended up in the British Columbia Court of Appeal.

In Top Line Industries Ltd. v. International Paper Industries Ltd.(1996), 20 B.C.L.R. (3d) 41 (C.A.), the Court of Appeal held that the lease was invalid. The reason that it was invalid is that it contravened s. 73 of the Land Title Act, the relevant portions of which read as follows:

(1) Except on compliance with this Part, no person shall subdivide land into smaller parcels than those of which he is the owner for the purpose of

(a) transferring it; or

(b) leasing it, or agreeing to lease it for a life, or for a term exceeding three years.

. . . . .

(4) No instrument executed by a person in contravention of this section confers on the party claiming under it a right to registration of the instrument or a part of it.
In other words, you can’t subdivide a property by leasing a portion of it. You have to go through the subdivision process set out in the Land Title Act, getting all of the necessary government approvals, and registering a subdivision plan in the Land Title Office.

The Court of Appeal held that the lease in the Top Line case was void because it purported to lease a portion of the land, thereby subdividing it without complying with the Land Title Act. The Court further held—and this to my mind does not necessarily follow—that the lease could not create contractual rights as between the landlord and the tenant.

It should be noted that Top Line cut both ways. In a subsequent ruling, the British Columbia Court of Appeal held that Top Line Industries Ltd. could not collect rent it claimed was owing to it from International Paper Industries Ltd. under a void lease.

The Top Line decision is not a popular one. In her introduction to the British Columbia Law Institute’s Report on Leases of Unsudivided Land and the Top Line Case, Ann McLean, Chair, wrote of the Top Line decision:

This ruling surprised real estate lawyers. It has also proved to be a continuing source of frustration to persons involved in commercial leasing and agriculture. The Top Line case has imposed additional costs on these persons. In addition, by giving persons a means to escape from their contractual obligations, it has added uncertainty to the law and raised the volume of itigation.
The British Columbia Legislative Assembly tried to fix the problems created by the Top Line decision by amending the Land Title Act in May 2007. The new provision is section 73.1, which says:

73.1 (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
(a) the lease or agreement for lease does not comply with this Part, or
(b) 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).
In other words, you can now lease a portion of your land for more than three years.

I suspect that when the legislators passed 73.1 of the Land Title Act, they thought they had fixed the problems created by the Top Line decision, protecting those who had in good faith entered into long-term leases of portions of land, including orchard properties. But did they?

In a decision released last week, Idle-O Apartments Inc. v. Charlyn Investments Ltd., 2010 BCCA 460, the Court of Appeal held that section 73.1 of the Land Title Act does not apply retrospectively to leases signed before section 73.1 came into effect. In that case the tenant entered into a 99 year lease with Idle-O Apartments Inc. of land near Osoyoos Lake. The lease was of .62 acres of a 3.49 acre lot. The lease was later extended to 998 years. The principals of Charlyn Investments Ltd. used the land for their personal and family use. A dispute arose between the landlord and tenant, and in May 2004, the landlord started a court proceeding asking the court to declare the lease void.

In the Supreme Court of British Columbia, Madam Justice Morrison held that section 73.1 of the Land Title Act (which was passed after the landlord began the lawsuit, but before the date of judgment) applied to the lease, and held that it was valid. She wrote:

[111] In my view, s. 73.1 is clearly remedial legislation. It was passed to bring fairness and equity to a situation like this. The mischief or hardship caused by the Top Line case was so apparent that the BCLI as well as the provincial legislature drafted legislation to ensure that the unfairness would not continue.

[112] This is a situation where the intention of the legislature is before us; the mischief must be corrected.

[113] The rules of statute construction allow the courts to go beyond strict literal interpretation, given certain circumstances. Namely, to avoid unfairness, observe the rule of law, and give full meaning to the intention of the legislature.

Her decision is reported at 2008 BCSC 849.

The Court of Appeal overturned the Supreme Court decision. Madam Justice Levine held that s. 73.1 did not expressly state that it applied retrospectively, nor was it necessary to apply it retrospectively “by necessary implication required by the language of the Act…” She wrote:

[36] The trial judge’s conclusion that s. 73.1 must be given retrospective effect on the basis that it is remedial legislation is not supported by the well-established legal principles that govern the interpretation of statutes and their applicability. It follows that the lease is invalid and unenforceable, as dictated by the decision in Top Line.

[37] There is no question that this result creates what the BCLI referred to in its report on the implications of Top Line: “A Declaration that an agreement is void ab initio can cause a disaster for one party and a windfall for the other.” These parties carried on for 26 years on the basis that they had entered into a valid lease. However, unless and until this Court decides that Top Line was wrongly decided, or the Legislature makes it clear that s. 73.1 is to be given retrospective effect, leases entered into before the enactment of s. 73.1 on May 31, 2007 are invalid and unenforceable.
The other possibility is that one of these cases will go to the Supreme Court of Canada (although unlikely), which could also hold that Top Line was wrongly decided. In the meantime, the validity of possibly thousands of long-term leases covering portions of lots is in doubt, including many leases of orchards, some perhaps in my neighbourhood.

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