In the March 2014 issue of Fully Secured, we discussed purchaser’s liens as canvassed in the case of Pan Canadian1. The purchaser’s lien is a somewhat obscure equitable remedy that can transform a purchaser into a secured creditor. At the time of that publication, Pan Canadian was under appeal. The British Columbia Court of Appeal decision has now been released2, substantially overturning the results of the lower court decision.
In Pan Canadian, the holder of a construction mortgage foreclosed upon an incomplete residential townhouse development. The property was sold, the construction mortgage was fully paid out, and the remaining funds were paid into court.
Two groups claimed priority over those funds. Regrettably, the funds were not nearly enough to satisfy both of their claims. The first group consisted of purchasers that had paid for prospective townhomes in full. The purchasers had argued that their payments created purchaser’s liens that gave them a secured charge against the land and priority over the funds. The second group consisted of judgment creditors that held judgments registered against the title of the property. The judgment creditors has raised several technical arguments focused on deficiencies in the purchase contracts.
A purchaser’s lien arises when a purchaser of property provides a deposit or other funds to the vendor in part or whole payment of the purchase price. The purchaser’s lien forms an equitable charge over the property. The purchaser thus becomes a secured creditor in the property to the extent of the payment. If the vendor fails to perform the contract of purchase and sale, the purchaser can recover the deposit or other funds and is entitled to a lien on the property. However, if the purchaser fails to perform its part of the contract, the lien is lost.
The chambers judge held that no binding contract of purchase and sale for land existed. However, such a contract was not required in her view, as the lien could exist independently of such a contract by virtue of the principles of equity. Consequently, the chambers judge held that the purchasers each had a purchaser’s lien, and thus had priority over the property sale proceeds of approximately $2.5 million paid into court.
The Court of Appeal overturned the decision of the chambers judge. Crucially, it held that a binding contract of purchase and sale for the purchase of land had to exist before a purchaser’s lien could arise3.
The Court of Appeal agreed with the chambers judge that no binding contract for the purchase and sale of land existed, though their reasons for this conclusion differed somewhat from that of the chambers judge. First, the payments made by the purchasers were not directly used to purchase strata lots. This would have been impossible as the strata lots were never created; stratification of the property was never completed. Instead the purchasers merely had contractual rights to obtain contracts of purchase and sale for strata units, after stratification was complete and acceptable disclosure statements were received.
Secondly, the appellate Court found that the contracts contained a “protective clause” that specifically stated that the agreements entered into by the purchasers created contractual rights only, and not any legal or beneficial interest in land.
A third, less important, factor for the appellate Court was the fact that the purchasers had provided funds to, and entered into agreements with, a company known as Lallico. However, Lallico did not own the property that was to be stratified, and there was conflicting evidence as to whether Lallico (and/or its personal representative) could actually bind the numbered company that was the true owner of the property.
The Court of Appeal then went on to hold that even if a binding contract of purchase and sale for land was not required for a purchaser’s lien, the protective clause in the contracts was fatal for the purchasers. Through it, the parties had agreed that no legal or beneficial interest in land was transferred to the purchasers. The Court held that equitable remedies, including purchaser’s liens, may be excluded or modified by agreement of the parties, and that was the effect of the protective clause4.
Ultimately, because the purchasers did not have purchaser’s liens, the judgment creditors were successful and found to have priority over the property sale proceeds paid into court.
Justice Chiasson, in a separate concurring opinion, held that the purchaser’s lien was excluded by operation of the protective clause, and found it unnecessary to address the other substantive issues under appeal.
The Court of Appeal expressed sympathy for the purchasers, but noted that “hard cases make bad law”. This was a clear statement by the Court that equitable protection has its limits, and those limits cannot be ignored.
It remains to be seen if there will be a Round 3 further appeal in this contest.