Is a beneficial owner of real property affected by a restrictive covenant that was mistakenly removed from title? The BC Supreme Court considered this question in BC Retail Partners (Boitanio Mall) Ltd. v. Overwaitea Food Group, 2015 BCSC 404.

In 2004, BC Retail Partners General Partnership (the “General Partnership”) and BC Retail Partners (Boitanio Mall) Ltd. (“BC Retail”) purchased one of the three lots comprising Boitanio Mall in Williams Lake, British Columbia. BC Retail was the registered owner of the lot, and the trustee, nominee and agent for the General Partnership, which was the beneficial owner of the lot.

When they purchased the lot, both BC Retail and the General Partnership were explicitly told by their solicitor that the lot was subject to a restrictive covenant in favour of Overwaitea Food Group, which operated a Save-On Foods on another lot in Boitanio Mall. The restrictive covenant prohibited any other premises in the mall from being used for a grocery store. However, at some point after BC Retail and the General Partnership agreed to purchase the lot, but before the transfer of title was registered in the land title office, the restrictive covenant was erroneously released from title.

In 2008, BC Retail and the General Partnership sold their Boitanio Mall lot to Janda Group Holdings W.L. Ltd. (“Janda”). To avoid property transfer tax, BC Retail remained the registered owner on title while the General Partnership transferred its beneficial interest to Janda. Janda also bought the shares of BC Retail and replaced the director and officer of BC Retail with a director and officer related to Janda. When this transaction took place, the restrictive covenant was not on title, so Janda and the new director and officer of BC Retail had no notice of it.

The mistaken removal of the restrictive covenant only became an issue in about 2013 when BC Retail and Janda attempted to lease a large retail space on their lot that had previously been occupied by Zellers to Loblaw’s. Overweaitea Food Group caught wind of the plan for Loblaw’s to move in and asserted their intention to enforce the restrictive covenant.

Normally, a purchaser like Janda who had no notice of an unregistered interest would be protected by section 29 of the Land Title Act, R.S.B.C. 1996, c. 250, and would not be bound to adhere to the terms of a covenant that was not registered when the land was transferred to them. However, despite their lack of knowledge, the Court found that Janda and BC Retail were not protected from the unregistered interest by section 29 of the Land Title Act, because of the structure of the transaction they used to purchase their interest in the lot.

How did the structure of the transaction change things? As far as the land title office was concerned, the ownership of the Boitanio Mall lot was never transferred since Janda only obtained the unregistered, beneficial interest from the General Partnership, and BC Retail had remained the registered owner on title since 2004. Since the Land Title Act is based on registration, only a registered owner, not a beneficial owner is entitled to the protections of the Act.

Therefore, the Court found that BC Retail continued to remain bound by its knowledge of the existence of the restrictive covenant, notwithstanding its erroneous removal by the land title office, and the fact that the present principals of BC Retail and Janda did not know about the restrictive covenant. The Court found that the knowledge was not “lost” by BC Retail, but rather either deliberately or negligently not passed on to the new principals of BC Retail and Janda when the former principals of BC Retail and the General Partnership transferred their interest.

Although this was an unusual circumstance since interests are not usually inadvertently released from title by the land title office, purchasers who obtain only an unregistered, beneficial interest may wish to pay attention to historical discharges, especially where important restrictions may exist.