The Supreme Court of Canada confirmed that while correctness is the appropriate standard of review for interpretation of the common law and statute, the palpable and overriding error standard applies to a lower court’s interpretation of a contract.

[2016] S.C.J. No. 19

2016 SCC 19

Supreme Court of Canada

May 6, 2016

McLachlin C.J. and Abella, Cromwell, Moldaver, Karakatsanis, Wagner, Gascon, Côté and Brown JJ.

Lougheed Block Inc. (“Lougheed”) owned the Lougheed Building located in downtown Calgary when it was designated a “Municipal Historical Resource” under the Historical Resources Act (“HRA”) in 2004. Lougheed agreed to rehabilitate the building and adhere to certain restrictions. In exchange for the rehabilitation expenses and for any decrease in economic value due to the designation, the City of Calgary agreed to pay Lougheed $3.4 million (the “Agreement”) in 15 annual instalments (the “Instalments”).

In November 2006, Lougheed borrowed money from Equitable Trust. The loan was secured by, inter alia, the assignment of the Agreement. In May 2009, Lougheed defaulted on the loan. Equitable Trust commenced an action to enforce some of its security. As a result, an offer was made by the parent company of 604 1st Street SW Inc. (“604”) in July 2010 (the “604 Offer”) to purchase Lougheed and the offer was accepted.

Before the sale’s closing date, Lougheed applied to a master of the Court of Queen’s Bench for a declaration that the Instalments were not an interest in land and were not included in the assets being sold to 604. The issue included whether the Instalments constituted a positive covenant running with the land by virtue of the HRA and whether they were sold in the sale of Lougheed.

The master issued the declaration which was upheld by a chambers judge. It was found that the Instalments did not run with the land by operation of the HRA and that they had not been sold to 604. On further appeal to the Court of Appeal, the majority allowed the appeal holding that the HRA createssui generis covenants that displace the common law rule that positive covenants do not run with the land. Accordingly, it was held that the Instalments ran with the land.

The SCC allowed the appeal. The SCC confirmed that correctness is the appropriate standard for reviewing the chambers judge's interpretation of the common law, as well as the HRA, but that the palpable and overriding error standard applies to the judge’s interpretation of the Agreement and 604 Offer since contractual interpretation is a question of mixed fact and law.

In this matter, the SCC noted that the common law rule is that no personal or affirmative covenant requiring the expenditure of money or the doing of some act can, apart from statute, be made to run with the land. The issue in the appeal was whether and to what extent s. 29 of the HRA displaced the common law rule by permitting positive covenants to run with the land.

The SCC agreed with the chambers judge that s. 29 of the HRA limited the positive covenants that may run with the land to those that are in favour of the City or of the other person/organizations listed in s. 29 and are enforceable by that entity. Given the object of the Act and intention of Parliament, the SCC found that a purposive and contextual analysis of the HRA, and particularly of s. 29, showed that the legislation did not have a broader reach by necessary implication. Therefore, it was found that the HRAdid not permit positive covenants in favour of an entity not listed in s. 29 to run with the land.

In addition to the conclusion arising out of the SCC’s interpretation of the HRA, the SCC found that the Agreement itself did not reveal an intention that the Instalments would run with the land. Therefore, the SCC held that even if the common law rule could be circumvented in the case at bar, 604’s claim to the payments would still fail. The SCC further held that there was no palpable and overriding error in the interpretation of the chambers judge in this regard. Additionally the SCC found that the Instalments were not sold to 604 in the sale.

The SCC also held that the Instalments are a chose in action, as the right to payments is contractual and not an interest that runs with the land. Therefore, the any interests in the Instalments were not exempt from the Personal Property Security Act.