A recent decision of the Alberta Court of Queen’s Bench has confirmed the priority of registered interests in land against an unregistered trust for deposit monies, and has highlighted the need for purchasers to ensure their deposits are properly protected against the claims of parties holding registered interests.

The decision in 1864684 Alberta Ltd.1 involved a dispute between four classes of creditors over the net sale proceeds (the “Proceeds”) from the sale of certain lands (the “Lands”) that were being developed as a commercial condominium by 1693737 Alberta Ltd. (the “Developer”). The Developer failed to develop the Lands, leading to the Lands being sold in a court-supervised receivership. The first class of creditors (the “Purchasers”) had, under agreements for purchase and sale, paid deposits (the “Deposits”) to the Developer to purchase condominium units being constructed on the Lands. The Purchasers claimed priority to the Proceeds under a statutory trust pursuant to the Condominium Property Act2. The second class of creditors (the “Lienholders”) had registered builders’ liens (the “Builders' Liens”) against title to the Lands. The Lienholders claimed priority to the Proceeds based on the order of which such interests were registered against title to the Lands pursuant to the Land Titles Act3. The third class of creditor (the “Caveat Holder”) had registered a caveat against title to the Lands and advanced the same argument as the Lienholders. The fourth class of creditor, a mortgagee, did not participate in the application, but the court did not indicate why.4

The sole issue to be decided by the court was whether the trust claims advanced by the Purchasers had priority over the registrations on title to the Lands. In reaching its decision, the court reviewed the two competing provincial regulatory schemes at play and the public policy interests behind each: (i) consumer protection under the Condominium Property Act, and (ii) the Torrens land registry under the Land Titles Act.

The court noted that the Condominium Property Act is intended to protect purchasers from “hit and run” developers by imposing, pursuant to Section 14 of that Act, a statutory trust and holdback provision in respect of deposits.5

On the other hand, the court described how the Land Titles Act is intended to provide certainty of interests in land and sets out a scheme for determining priority of those interests. Generally, subject to certain exceptions an alteration or modification by another statute, priority is determined by order of registration. As a result, subject any to such alteration or modification, the registered interests of the Lienholders and the Caveat Holder (and presumably any registered mortgagee) had priority over the unregistered trust claims of the Purchasers.6

The critical decision of the court was whether or not the provisions of the Condominium Property Act altered this priority scheme.7 The court held they did not. While the Condominium Property Act imposed a statutory trust, in the court’s view it did not provide for the trust to be separately enforceable without registration, nor did it go so far so to impose a trust on the Lands themselves or exclude or modify the provisions of the Land Titles Act. As well, and perhaps critically, the court found that, in contravention of the Condominium Property Act, the Deposits had been co-mingled with other funds and used by the Developer to pay costs associated with the development of the Lands. At this point any trust interest associated with the Deposits became an interest in the Lands and subject to the Land Titles Act and its registration requirements.8 The court did not speculate on whether the same decision would have been reached if the Deposits had remained in trust in accordance with the Condominium Property Act.

Ultimately, the court held that the registered interests of the Lienholders and the Caveat Holder took priority over the unregistered interests of the Purchasers. To hold otherwise “would undermine the commercial certainty” created by the Torrens land registry system.9 The court acknowledged that while the burden of its decision would fall on the Purchasers, the Purchasers had the right at any time to register their interests on title to the Lands (by the time of trial all had in fact done so, although too late to be of assistance).

This decision provides comfort to mortgagees and other holders of registered interests in land in Alberta that their interests will prevail against unregistered trust claims for deposits. It also provides two important lessons to prospective condominium purchasers: (i) if required to make a deposit (as is almost always the case), the potential purchaser is well advised to receive assurances from developer that the deposit will in fact be held by the developer in trust. Any language to the contrary in the purchase and sale agreement should serve as a warning to potential purchasers that the developer may not be in compliance with the requirements of the Condominium Property Act; and (ii) although not often done, but as suggested by the court, a caveat in respect of a purchaser’s interest can be registered against the title to the applicable lands.