The purchase of real estate is, for most people, the largest purchase they will ever make in their entire lives. For that reason alone, it is important that all parties to a real estate transaction clearly understand the terms of the deal they enter into, regardless of the amount of money being exchanged. This is particularly so where the property is subject to encumbrances, rights of way, etc.  Failure to clearly and accurately comprehend the terms of a real estate deal may have significant consequences, as amply demonstrated by the recent case of Crown Fortune International Group Inc. v Bonnefield Canadian Farmland LP III.

Encumbered Land Becomes Subject of Real Estate Purchase Transaction

The Crown Fortune case involved the purchase, by Crown Fortune, of 15 contiguous parcels of land located in British Columbia, which were offered by sale by the respondent Bonnefield. Crown Fortune tendered a contract regarding the lands on July 3, 2017; on July 5, 2017, Crown Fortune paid a refundable deposit of $50,000. Bonnefield accepted the contract on July 25, 2017, subject to a purchase price of $6.8 million and a closing date of October 30, 2017. Three days later, on July 28, 2017, Crown Fortune removed all of its “subject to” conditions in relation to the sale and paid a further $1 million deposit.

When the parties entered the contract, 65 encumbrances were registered against the properties, all related to oil and gas extraction. Crown Fortune was aware of the encumbrances when it entered into the contract and that the properties generated revenue concerning oil and gas extraction.

Failure to Close Real Estate Deal Leads to Lawsuit

As the agreement of purchase and sale dictated that the purchase of the properties would, in part, be financed by a vendor take-back mortgage, “on October 17, 2017, Bonnefield provided Crown Fortune with the terms of the mortgage, which listed all 65 encumbrances as ‘Permitted Encumbrances’”. Two days later, on October 19, 2017, Bonnefield advised Crown Fortune that, in keeping with the contract, all but two of the registered encumbrances had to be removed before the deal closed. Crown Fortune responded by assuming that all encumbrances were allowed to remain on title to the properties. Due to the ongoing dispute regarding the terms, the deal did not close as intended on October 30, 2017. Instead, Crown Fortune commenced an action on October 31, 2017, seeking specific contract performance or damages for breach. 

By the time of the trial in 2022, Crown Fortune had amended its position to acknowledge that certain encumbrances were permitted to remain on the title to the properties, with the result that it now argued that 39 of the 65 encumbrances were required to be removed before the sale could be completed. Bonnefield continued to maintain that all 65 encumbrances were permitted.

Title Clause at Heart of Issue

At the original hearing of this matter in 2022, the trial judge noted that the parties dispute revolved entirely around the wording of the “Title Clause” of the contract, which dictated as follows:

“Title: Free and clear of all encumbrances except subsisting conditions, provisions, restrictions, exceptions and reservations, including royalties, contained in the original grant or contained in any other grant or disposition from the Crown, registered or pending restrictive covenants and right of ways in favour of utilities and public authorities, the accepted tenancies and any other additional permitted encumbrances set out in Schedule 22.”

The Trial Judge’s Findings and Reasons

The trial judge noted that the entire dispute could be boiled down to a disagreement over the interpretation of the phrase “contained in a grant or disposition from the Crown,” as used in the Title Clause excerpt above. Given that the Title Clause allowed for restrictions, so long as they were contained within the original Crown grant, the trial judge had to determine whether each disputed encumbrances could be categorized as a Crown grant. 

To that end, the trial judge found that each of the encumbrances under dispute could be broadly placed into one of three categories: the assignment of grants, the assignment of rents, and the assignment of surface leases. After reviewing each specifically disputed encumbrance, the trial judge found that “all three categories of Dispute Encumbrances were contained in the original Crown grant and therefore did not need to be removed from the title to comply with the Title Clause.”  Given the finding that Bonnefield had not been bound to remove the encumbrances in question before closing the deal, Crown Fortune had unlawfully refused to close the transaction. As such, its $1 million deposit was ordered to be forfeited.

Crown Fortune Appeals; Loses Again

Crown Fortune appealed the trial judge’s findings, and the Court of Appeal reviewed the original decision based on palpable and overriding error. The court noted that the review would be undertaken based on the principles of the Supreme Court of Canada decision in Sattva Capital Corp. v Creston Moly Corp., wherein the court provided a roadmap to modern contractual interpretation. In keeping with that decision, the court was bound to consider the whole contract in assessing the parties’ intent and understanding when entering into the contract while assigning the words used in the contract their “ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract.” 

Bearing these principles in mind, the court noted that the meaning of “clear title” has been extensively litigated, with the result that “a contract of purchase and sale for the clear title of a property requires that all encumbrances registered against the property be removed by the vendor, except those specifically contemplated in the contract.” As such, the issue requiring determination in this case was whether the contract contemplated any encumbrances. 

The court applied these principles to the three categories described above (grants, rents, and surface leases). It concluded that the trial judge had not erred in any of his analysis or findings with respect to these categories, with the result that the trial judge had properly found each category to have been contemplated by the Title Clause in the original contract. As the Court of Appeal stated, “there is no principled basis upon which to distinguish between the grant of access to private lands and the compensation payable for that access. Given my finding that the encumbrances relating to surface leases fall within the Title Clause, it follows that agreements relating to the Rent Proceeds payable in connection with those leases, including assignments of the Rent Proceeds, must also fall within the Clause”. The lower court’s decision was allowed to stand, and Crown Fortune forfeited their $1 million deposit.

Contact The Commercial Litigation Lawyers At Meridian Law Group In Vancouver To Discuss Your Property Dispute Needs

If you are involved in a commercial dispute involving the purchase or sale of real estate, you need capable, quality legal representation. Contact Meridian Law Group in Vancouver today to schedule a consultation with one of our experienced lawyers. Our commercial litigators have the skills and knowledge to guide you through this process with ease while ensuring that your rights are preserved and that you recover every dollar to which you are entitled. 

From our offices in Vancouver, Meridian Law Group is proud to serve clients throughout the province of British Columbia. Contact us online or by telephone at (604) 687-2277 to schedule a confidential consultation.