Study Guide readings for Unit 10

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SALS - Home Unit 10: Real Property, other Property Rights, and Property Insurance Thursday, 19 April 2012, 08:03 AM

Course: LGST 369: Commercial Law (Revision 7)

Unit 10 Introduction, Objectives, and Readings 10.1 What is Real Property? 10.2 Estates in Land 10.3 What is an Interest in Land? 10.4 Purchasing Real Estate 10.5 Leasing Real Estate Study Questions Suggested Answers to Study Questions (2nd ed.) Suggested Answers to Study Questions (3rd ed.) Assignment 5 Final Exam

Introduction
Real property, real estate, and land are interchangeable legal terms. The standard definition for these terms is land, and anything relatively permanently attached thereto. So, if you buy, sell, or own a piece of property, you also buy, sell, or own the dirt and anything relatively permanently attached thereto. Those attached items are called fixtures. This unit also examines the basic law related to personal property and bailment, property insurance law, and intellectual property rights.

Learning Objectives
After completing this unit, you should be able to 1. define real property, and determine when an item becomes a fixture. 2. explain the significance of Crown ownership of all real property. 3. define an estate in land, and describe the various methods of holding an estate in land including fee simple, joint tenancy, tenancy in common, life estates, leasehold estates, and condominiums. 4. describe the common major interests in land including easements/right of way, restrictive covenants, profit prendre, mortgages, and leases. 5. list the common covenants in a mortgage, and describe the remedies available to the mortgagee. 6. list the common covenants in a commercial lease, and describe the remedies available to the landlord if the lease is breached. 7. describe how the Land Titles and the Registry systems work to protect both the holders of interests in land and the prospective purchasers of land. 8. explain the difference between real and personal property and the concept of bailment of goods. 9. explain the basic principles of insurance law and how insurance assists business. 10. explain what is meant by intellectual property and the differences between patents, trademarks, copyright and franchising.

Reading Assignment
Managing the Law, Chapters 15, 16, 17 and 18 (2nd and 3rd eds.)

Consider the sale of 123 Main Street, the features of which are listed below: a 50 100 lot a three-bedroom bungalow eight pine trees a garage a fence an outdoor spa a deck a gas barbeque custom blinds a built-in dishwasher a washer and dryer set laminate flooring, with hand-woven oriental carpets a garden shed Which of the above noted items will be included in the sale of the property as fixtures? Lot: the dirt, clearly included. Bungalow: (things dont get more attached than this) included. Garage: attached, included. Fence: attached, included. Spa: depends on degree of affixation; if its relatively movable, it would not be included. Deck: either attached to the house, the ground, or both, and so is included. Barbeque: not attached, not included. Blinds: window coverings are not generally considered a fixture, so they would not be included. Dishwasher: if its built-in, it is considered attached and goes with the house. Washer/Dryer: not attached in any relatively permanent way, so they are not included. Flooring/Carpets: the laminate flooring is likely attached and included; the carpets may only be tacked down and are not included. Shed: not usually attached or affixed to the real estate in any way, and therefore, not included. So, determining what is or is not a fixture can be tricky when one is dealing with the question of how permanently something is attached. Many contracts for the sale of real estate include certain specified items called chattels, which are not fixtures. For example, the sale agreement for 123 Main Street may include the washer and dryer. But the washer and dryer must be

expressly listed in the sale agreement in order for the items to be included. All fixtures are included in the sale agreement without being expressly listed, unless they are expressly excluded. Now that you understand what is meant by the term land or real property, you must consider the following questions: How land can be held, that is, how are the rights to exclusive use and possession acquired (estates in land)? What kinds of interests in land does the law recognize, apart from the right to exclusive use and possession (interests in land)?

As your text points out, an estate in land is the exclusive right to possession, which includes the right to use. In Canada, the Crown notional owns all of the land in the country. The highest level of rights a person can have to land is the estate in fee simple. From a practical point of view, this type of estate in land equates to ownership. However, note the following limitations to ones rights as an owner, in particular, tort law, government regulation regarding land use, and governmental ability to expropriate. A life estate is often used to provide for a family member during his or her lifetime, with contingent plans for the property to be carried out upon the death of that person. The leasehold estate is very important in the business world. Because of the expense involved in purchasing real estate, especially for a small business, most business activities are carried on in leased premises. From a risk management perspective, all business persons should have a basic understanding of the law concerning commercial leases, and they should certainly seek the advice of a lawyer before entering into one. (Review Concept Summary 15.1, 2nd ed. p. 337; 3rd ed. p.351.)

The possibility of shared ownership is also important. A summary of the two types of joint ownership appears below. Joint Owners (also called Joint Tenants) Each owns all the land. Each has exactly the same interest in the property. Co-owners (also called Tenants in Common) Each has an interest in the whole of the property, which may not be equal.

Definition

Has the right to survivorship. If one joint owner dies, the others automatically share the interest in the property. A joint owners interest cannot be disposed of to someone else through a will (Example A). Features The interest held by the joint owners is undivided (Example B). There is the possibility of severance, in which case, an owner may be treated as a co-tenant (Example C).
Example A

There is no right to survivorship. A co-owner may sell or dispense of his interest by will (Example D). The interest held by the co-owners is undivided (Example E).

Ed, Lewis, and Sam are joint owners in a warehouse and thus, have exactly the same interests33 1/3 per cent. When Sam died, Ed and Lewis remain joint owners, with each having a 50 per cent interest. If Sams will said that his interest in the warehouse was to pass to his daughter, it would not occur because of the right of survivorship. Example B Ed, Lewis, and Sam are joint owners in a warehouse and thus, have exactly the same interests33 1/3 per cent. However, they

cannot claim to own a specific or particular 1/3 portion of the warehouse. They each have a 1/3 interest in the whole of the property. Example C Ed, Lewis, and Sam are joint owners in a warehouse and thus, have exactly the same interests33 1/3 per cent. When Sam sold his interest to his daughter, Tess, the sale would have altered the nature of Sams interest by severing the joint ownership. Tess would become a co-owner with Ed and Lewis, but Ed and Lewis would remain joint owners as between themselves. Sams sale to Tess does not alter the nature of Ed and Lewis interests. It is only Sams former interest that has changed character. If Tess dies, her interest in the warehouse will pass to her heirs as part of her estate. However, if Ed dies, Lewis will automatically acquire his interest as a joint owner and have a 66 2/3 per cent interest. Lewis and Tess (or her heirs) would then be co-owners of the property. Example D Ed, Lewis, and Sam are co-owners in a warehouse. Because Sam put in the most money, he has a 50 per cent interest; Ed and Lewis each have a 25 per cent interest. When Sam died, his will said his interest in the warehouse should pass to his daughter, Tess. Accordingly, Tess will have a 50 per cent interest in the property, with Ed and Lewis each retaining their 25 per cent interest. Example E Ed, Lewis, and Sam are co-owners in a warehouse. Because Sam put in the most money, he has a 50 per cent interest; Ed and Lewis each have a 25 per cent interest. Sam cannot claim any particular half of the warehouse as his. He has a half interest in the whole of the warehouse.

What are the advantages of these forms of ownership? Joint ownership ensures you wont end up holding property with someone to whom you dont want to be connected. Co-ownership gives you the freedom to dispose of your interest, particularly at death. Decisions about the type of shared ownership to opt for can be critically important. Consider what problems arise when one owner sells. This happened between a married couple whose marriage broke down. The husband sold to someone else without his wife's consent and she was left with litigation as a result. See:

Warnke v. Skrobek, 2000 ABQB 340 (CanLII)

Now consider this situation from a business perspective. Say I set up and ran a business with my brother. We both owned several warehouses as a part of the business. If we held them as joint owners, I would receive the whole of the interest in the warehouses if my brother died. However, if we owned the warehouses as co-tenants, my brothers interest would pass to his heirs upon his death. If he wills his interest to his son, who I think is lazy and greedy, I may find myself having to deal with the son on various business matters; not an ideal situation from my point of view.

An interest in land gives someone rights to the land, but not the right to exclusive use and possession. They are somewhat lesser rights. Nevertheless, they are important, because these lesser rights are capable of running with the land. Running with the land is a critical concept in real property law. It describes how certain rights, which belong to a nonproperty owner, can bind all subsequent landowners. To illustrate: Barb owns Property X. Harry has certain rights to Property X, but he is not an owner. Barb and Harry entered into a contract for these rights. If Harrys rights constitute a legally recognized interest in land, his rights are capable of running with the land. Barb sells Property X to Kathy. Kathy will be bound to recognize Harrys rights to Property X, even though she did not make the initial deal with him. Thus, contracts that set up interests in land become an important exception to the rule concerning privity of contract. In the example above, Kathy is bound by the arrangement Barb made with Harry, even though she was not privy to that original agreement. But, if Harrys rights cannot be categorized as an interest in land, then Kathy will not have to recognize them.

Types of Interests in Land

The most common types of interests in land are summarized in the chart below. Type Definition Features Dominant tenement (benefits from the easement), and a servient tenement (accommodates the easement) To be distinguished from a license (no dominant/ servient tenements) Requires one piece of property that benefits from the arrangement (dominant tenement), and one piece of property that is subject to limited use (servient tenement) Generally, subsequent owners are bound by negative promises, but not by positive ones; a subsequent owner would be required to refrain from an action, but not required to take action Example

Easement

A right to use a neighbors land

Nora owns the land next to Petes. Petes land has a lake on it. Nora and Pete agree that Nora can run her cattle across Petes property to water them.

Restrictive Covenant

A promise to use land in a way that benefits one and burdens the other; limits the use of the servient tenement

Nora owns farmland. She wishes to sell the pasture to Pete, but wants to retain several acres for herself. She and Pete agree that the pasture will not be used for anything other than agricultural purposes, so that the acres with Noras home on it retains its rural character.

 Residential leases (for private homes) are closely governed by legislation A right to exclusive use and possession of property for a period of time Commercial leases (for business purposes) are less regulated by legislation; they can be complex contracts Leases can be for various types of tenancies: fixed term, periodic, at will, and at sufferance. Not all rights to land are subsumed in the category of interests in land. Matrimonial Property/Dower Rights: Domestic relationships are the basis for special statutory claims to real estate, the nature of which varies from province to province. Sometimes a sale cannot be made without the consent of the partner; sometimes one partner has the right to exclusive use and possession of property. Any real estate transaction should carefully consider these potential claims. Licenses: Licenses are viewed as purely contractual arrangements. The rights acquired through licenses do not run with the land, and no subsequent owners would be bound by them. A license gives one the right to use a property in some specified way. For example, I might allow you to park your recreational vehicle on my acreage for six months a year, for $100. I would be bound by that arrangement for however long was set out in the contract. But, if I sold my acreage, the new owner would not be bound by our arrangement. Before leaving the discussion of interests in land, one should consider rights by prescription or adverse possession. Your text notes (2nd ed. p.341; 3rd ed. p.355) that these are rights that are acquired through use and occupation, as opposed to express agreement. Legislation in provinces that use the Land Titles system of registration has abolished the acquisition of rights to land by these methods. Nora owns farmland. She agrees to rent Pete a quarter section for five years so that he can plant a crop on it.

Lease

Methods of Registration
Registration is critical in order to protect the ability of an interest in land to bind the subsequent owners of that land. When you think about purchasing a piece of real estate, there must be some method wherein you can determine what interests a piece of property is subject to, prior to your purchase. The timing of a registration is also important. The rule is he who registers first gains priority over subsequent interests. If two agreements for sale exist for the same piece of property, whoever registered first would be entitled to the land. In Canada, two methods of registration are usedthe Registry System and the Land Titles Systemand no matter which registration system is in place, if you have an interest in land and you want to make the subsequent purchasers of the land subject to your interest, you must register your interest!

Registry System
All documents relevant to interests in land must be filed at a central registry. Anyone interested in that property can inspect these documents and determine how they affect legal interests in the land. Parts of Ontario and Manitoba, and in the Atlantic Provinces Quebec uses a registration system that is based on the civil law system.

Land Titles System

What is it?

All documents relevant to interests in land must be filed at Land Titles. Each parcel of land is issued a Certificate of Title, which lists all the interests in land attaching to that particular piece of property.

Where used?

Parts of Ontario and Manitoba, and in Saskatchewan, Alberta, British Columbia, and three Northern Territories

Purchasing real property can be a risky business. Review Concept Summary 16.1 (2nd ed. p.363; 3rd ed. p.380) to ensure you are familiar with some of these risks and the ways to alleviate them. Mortgage financing is often needed to complete a purchase of land. Because mortgage is a contract, all the general rules of contract law also apply to mortgages. Nevertheless, mortgages have the following unique features: The person or institution who loans the money acquires an interest in the land when they take a claim in the land as security for repayment. The effect of a mortgage on ownership depends on whether a Registry System or a Land Titles System is in place. People who borrow money to buy a house often say, the Bank owns it. This is only true in a Registry System, where a mortgage actually conveys ownership to the mortgagee. In a Land Titles System, the mortgagee only has a claim to, or charge against, the land. It is possible to have more than one mortgage interest in a single piece of property. You can use the difference between your obligation to the first lending institution and the value of the property to secure further mortgage financing. However, the first priority to the land will go to the mortgage that was registered first, so subsequent mortgages may be vulnerable in terms of actually claiming the land in the event the loan is not paid. It is possible for the lender or mortgagee to assign its rights pursuant to a mortgage. The mortgagee must acquire not just an assignment of contractual rights, but also the right to the property itself (see the text 2nd ed. pp.370-372; 3rd ed. pp.386-388). A borrower or mortgager can also off-load his mortgage obligations (usually in the event of a sale), but the new borrower or mortgagor cannot be subject to those contractual obligations by virtue of an assignment. While the property can still be used to satisfy the debt no matter who owns it, the original borrower is still obligated to repay the loan.
Hassan sold his office building to Ned. Hassan also assigned his mortgage to Ned, that is, Ned assumed Hassans mortgage. A few months after the sale, Ned quit making payments. The mortgagee can still foreclose on the property, notwithstanding the sale from the original mortgagor to Ned. The mortgagee may also try to collect payment from Hassan, notwithstanding the sale of the property and assuming legislation in the relevant province allows it. If Hassan ended up having to pay on the original mortgage, he could try and recover that amount from Ned as a breach of contract, because Ned failed to honour his promise to make the mortgage payments.

If the loan is not repaid, the options available to the lender include suing, taking possession of the property, foreclosure, and sale. Not all of these options are available in all circumstances. Of these options, foreclosure is the most severe and viewed as a last resort in some provinces. The land is taken by the mortgagee as repayment for the debt. The borrower loses any equity he or she has in the property and any subsequent mortgagors also lose their security. However, if the value of the property is less than the outstanding loan, suing for the difference is not usually allowed. If the lender pursues a judicial sale, the borrower would recover any equity in the property. However, the ability of the mortgagor to sue for any amount not recovered on the judicial sale may be restricted, depending of the legislation on the province involved. Some provinces severely restrict a mortgagees ability to sue on the covenant to pay (the contractual promise made by the mortgagor to pay back the entire amount borrowed from the mortgagee). In those cases, the mortgagee is restricted to the land to satisfy the debt and cannot try to collect any shortfall from the mortgagors other assets.

Review the section on Leases in your textbook (2nd ed. pp.345-351; 3rd ed. pp.359-367). Make sure you are able to distinguish between residential leases and commercial or business leases. Residential leases are highly regulated by statute, and the landlords rights and abilities can be somewhat restricted. Commercial leasing, on the other hand, is subject to little regulation; it is left mainly to the landlord and the tenant to define the rights and obligations between them as a matter of contract. Because they are most relevant to the business context, this section looks only at commercial leases. A lease is a contract that gives a tenant the right to use and possess real property for a period of time. There are four options that define that period of time: a fixed-term tenancy, a periodic tenancy, a tenancy at will, and a tenancy at sufferance (see text, 2nd ed. pp.346-347; 3rd ed. pp.360-361). Commercial leases can be very complex documents, which are often drafted by the landlords to their best advantage. Tenants are well advised to have a lawyer review a commercial lease before entering into it. Following are common clauses found in commercial lease agreements: A clause setting out responsibility for paying insurance, property taxes, and utilities: Where payment is the responsibility of the tenant, the lease is called a net lease or a triple net lease. If the landlord is responsible for such expenses, the lease is called a gross lease. A clause setting out an obligation to pay rent: This promise is viewed as unrelated to any other promises contained in the lease. The tenants obligation to pay rent does not depend on the landlord performing any of his obligations under the lease. This means that a tenant is not legally able to withhold rent, should a landlord not comply with some provision in the lease. A clause setting out responsibility for repairs of the premises: Without express terms placed in the lease, neither the landlord nor the tenant has an obligation to repair the premises, although if the situation is severe, it may amount to a breach of the promise of the landlord to provide quiet possession (see text, 2nd ed. p.349; 3rd ed. p.364). A clause obligating the tenant to continue business on the premises during the term of the lease and setting out the permitted uses of the premises: Present and prospective tenants may not consider a property desirable unless it appears to be full and vibrant. So, if the tenant vacates the premises, but continues to pay rent, the landlord could take legal action based on a breach of this clause. The landlord will also want to control the kinds of business activities take place on the premises in order to preserve the property, and possibly, to keep nearby tenants happy. A clause concerning assignment and subletting: The landlord wants to control who uses the leased premises. Thus, a lease usually includes a clause whereby the landlord must consent to any assignments or sub-leases, or a clause that outright prohibits them. A clause dealing with improvements to the leased premises: Generally, anything that becomes relatively permanently attached to the property is viewed as becoming part of the property (a fixture). There are some exceptions to this general rule in the case of tenant fixtures. However, to erase any doubt as to the tenants ability to remove certain items after the term of the lease, a clause dealing with this issue is often included in the lease. A clause prohibiting the landlord from interfering with the tenants enjoyment of the premises: (see text, 2nd ed. p.349; 3rd ed. p.364). A clause limiting the landlords ability to rent space to the tenants competitors:
Reg wants to lease space in a strip mall owned by Acme Property Ltd. He plans to open a hotdog and hamburger shop. To ensure that his business has a reasonable chance of success, Reg wants a clause in the lease whereby Acme agrees not to rent space in that strip mall to any other fast food restaurant.

Landlords Remedies
What legal avenues are available to address a partys failure to comply with a lease obligation?

 Eviction: Removing the tenant from the premises before the end of the lease. Distress: Seizure and sale of the tenants goods to cover unpaid rent. Note that eviction and distress cannot be used together. Eviction ends the landlord/tenant relationship, whereas the relationship is retained if the landlord exercises the right of distress. Injunction: A court order restraining the tenant from certain actions, usually using the premises in some prohibited manner. Retaking possession of the property and suing for damages: This area of law is not entirely clear. The key case on the topic is Highway Properties v. Kelly, Douglas and Co. [1971] S.C.R.562. In that case, the tenant had a 15-year lease, but vacated the premises after two years. The landlord retook possession of the premises and tried, unsuccessfully, to re-lease it. The questions was, could the landlord take possession of the property, try to re-lease it, and still claim whatever damages it may incur because the tenant did not follow through with the terms of the lease? Or, was the landlord limited to claiming damages only to the point where the tenant repudiated the lease, that is, vacated the premises? The court found that the landlord was entitled to do the former. This conclusion raised the further issue of whether the landlord was obligated to mitigate his losses by trying to find a new tenant. Or, could the landlord claim the remaining 13 years rent as damages? The Highway Properties case seems to suggest that the latter is an option for landlords. However, cases since 1971 suggest that a landlord is indeed obligated to keep losses to a minimum by finding new tenants in circumstances where the original tenants have walked away from a lease. The following excerpt from the British Columbia Law Reform Institutes (1989) Report on the Commercial Tenancy Act summarizes the dilemma:
The conventional view is that where a tenant abandons commercial premises, the landlord need do nothing more than sit back and insist on the continued existence of the tenancy agreement. The landlords claim is for rent rather than damages and no question of mitigation arises. If the landlord makes no attempt to re-let the vacant premises, this will not impair his ability to eventually claim the full rent provided for the tenancy agreement . . . The availability of this option in every case, however, is open to question. Doubt, in this regard, arises out of the decision of the Supreme Court of Canada in the Asamera Oil Corporation v. Sea Oil and General Corp. . . . Professor Waddams suggests that the import of this passage [from Asamera Oil Corp. v. Sea Oil & General Corp. [1979] 1 S.C.R. 633] is that an innocent party must always act reasonably.

The report goes on to suggest that it is hard to imagine any circumstances where a landlord would be acting reasonably by failing to mitigate losses.

Tenants Remedies
Sue for damages: The tenant can recover damages for any breach of lease obligations by the landlord. Injunction: The tenant can obtain a court order restraining the landlord from continuing any breach of the lease obligations. Termination of the lease: The tenant may terminate the lease and have no further obligation to the landlord. This option is only available in serious circumstances such as where the landlord interfered with the tenants use and enjoyment of the property to the extent that the tenant finds the premises unusable.

Note: Suggested answers to all study questions are given at the end of the unit. Try to answer these questions before referring to the provided solutions. If you have difficulty with any of the study questions, contact your tutor as soon as possible. All question numbers refer to both the 2nd and 3rd editions of the text unless otherwise noted. Suggested answers are provided separately for the two editions. 1. Answer Review Questions 1 to 20 (Ch 15). 2. Answer Review Questions 1 to 20 (Ch 16). 3. Read You Be the Judge 15.1 and answer Question for Discussion 1. 4. Read Business Decision 16.1 and answer Questions for Discussion 1 and 2. 5. Answer Cases and Problems numbers 5, 9, and 11 (Ch 15). 6. Answer Cases and Problems numbers 1, 9, and 11 (Ch 16).

Suggested Answers

Suggested Answers

After completing Part 4, you should be ready to do Assignment 5, which is worth 15% of your final grade. Directions for preparing and submitting this assignment are contained in the Assignments section of this website.

After completing all units 1 to 10 and receiving feedback on all your assignments, you should be ready to take the Legal Studies 369 Final Examination, which is worth 50% of your final grade. Directions for preparing for, requesting, and taking this exam are contained in the online Course Outline and Student Manual.