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Resulting and Constructive Trusts: All About Constructive Trusts

The Constructive TrustA constructive trust is formed by operation of law. It is considered an equitable remedy so as to prevent unjust enrichment, which is when the law imposes an obligation upon one party to hold specific property for another. The person so obligated becomes a constructive trustee towards the person to whom he owes performance of the obligation. Although the application of the constructive trust has been treated as an equitable remedy to prevent unjust enrichment in Canada, recently, constructive trust has been applied as a remedy to wrongful acts in the absence of enrichment and corresponding deprivation on the basis of the good conscience doctrine. There are two situations described by the Supreme Court of Canada when a judge would decide whether good conscience requires the imposition of a constructive trust. These two conditions are:Ill-gotten property obtained by a wrongful act of the defendant, notably breach of fiduciary obligation or breach of duty of loyalty; andSituations where the defendant has not acted wrongfully in obtaining the property, but would be unjustly enriched to the plaintiff’s cost by keeping the property.

Resulting and Constructive Trusts: Types Continued

Good WifeThe Ontario Superior Court of Justice decided in Citi Financial Ltd.v. Zaidi that the transfer of a residential property from a husband to his wife was void for fraudulent conveyance according to section 2 of the Fraudulent Conveyances Act.It was stated by Mrs. Zaidi that the transfer by her husband was not a fraudulent conveyance because he never acquired a beneficial interest in the property even though he acquired a title to it in joint tenancy with Mrs. Zaidi. She had paid the deposit and all of the mortgage payments since the time the property was purchased. She had included her husband’s name on the offer and they were named as joint tenants when the transfer of the property was registered. She asserted that her only intention in placing her husband’s name on the offer was to show respect for his position as head of the family and that she was not aware of the legal consequences of naming her and Mr. Zaidi as joint tenants. She added that she had done so to merely indicate that the two would be living together in the home.

Resulting and Constructive Trusts: The Various Types

Resulting Trusts Arising from Mortgage FraudThe Alberta Court of Appeal observed in Luitenko v. McAleer that a resulting trust arose out of mortgage fraud. The respondent, Erika Luitenko, who was ineligible for a mortgage, purchased a house by committing fraud with help from her friend Lada McAleer and Lada’s husband. The purchase price of approximately $185,000 was given by Ms. Luitenko as a down payment as well as the lawyer’s fee to complete the transaction. It was placed in the joint names of the McAleers and their son. Ms. Luitenko lived in the house for over two years starting October 2005, paying the appellants $1,150 per month to cover the cost of the mortgage payments, municipal taxes, and home insurance. She also paid all utilities, renovation, and general upkeep costs for the home.The value of the home continued to increase in a very short amount of time and by 2008 stood at $323,000.

The Lesson Learned from a Leasing Arrangement

In the previous installment, we reviewed a scenario when the lender can attorn rents and the tenant has to pay rent to the lender. Assuming that the tenant and lender have a non disturbance agreement and that the tenant chooses to stay and pays rent to the lender, the non disturbance agreement creates a monthly tenancy continuing as long as the tenant pays rent. With an existing non disturbance agreement, the tenant paying rent to the lender is not subject to an annual tenancy. Nor is the tenant bound by the original terms of the lease either. These are real benefits to the tenant, allowing the tenant to stay or go as it deems fit.However, a non disturbance agreement does not mean that the tenant has agreed to stay forever. There is always the option to leave. On the basis of the Goodyear case, the tenant can leave once the lender takes possession. So, the non disturbance agreement is one sided here. Opposite to this, an attornment agreement creates mutual obligations between lender and tenant. The tenant agrees to become the tenant of the lender and the lender agrees to become the landlord of the tenant, thus creating a tenancy stitching together both. It binds the lender to give the tenant possession and the tenant to pay rent.

ASSIGNMENT OF LEASES, RENTS, NON DISTURBANCE AND ATTORNMENT: How To Differentiate Between Them

In this context, Madame Justice McKinley also dealt with the situation where a lease is absolutely assigned by the owner of land but the reversionary interest in the land is not transferred to the assignee. Though it is not clear how the owner of land could keep the reversionary interest while assigning absolutely the benefit and obligations under the lease to a third party, Madame Justice McKinley commented that if that was possible there would be no privity of estate between the assignee and the non-assigning party since the reversionary interest remained in the landlord. The point is that privity of estate can only apply between the parties who hold the estate or interest in the land, the fee simple and the leasehold estates. Further on, at page 336, Madame Justice McKinley stated:“To the extent that he may have inferred that an absolute assignment of leases would have created privity of estate between the lessor and the mortgagee, I would not agree, unless that absolute assignment amounted to an assignment of the lessor’s reversionary interest in the land.”Choses in Action

A Discussion about the Assignment of Leases

As the Goodyear case considered in-depth assignments of rents and leases to determine the impact on the doctrine of privity, it is necessary to discuss the assignment of leases for several reasons.The court observed that a collateral assignment of the benefits of a contract as security for a mortgage did not result in the mortgagee assuming or becoming liable for any of the obligations under the contract. As the benefits of the contract are a chose in action, they are assigned to the lender for the sole purpose of enabling the lender to assert a right to receive the benefits through legal process. There could be no privity of contract between the non-assigning party to the contract and the assignee/lender because the obligations under the contract were not assumed by the lender.Reading the verdict, at page 329, Madame Justice McKinley states:“Although the assignment is specifically stated to ensure to the benefit of and be binding on successors and assignees of both the mortgagor and the mortgagee, that provision adds nothing to the rights and obligations of the immediate parties and cannot expand in any way the rights and obligations of their successors and assignees.”

The Law of Lease Assignments

Earlier we have seen how Goodyear benefited from its lawsuit against Burnhamthorpe. This verdict is compared with the generally accepted good law set out in Corbett v. Plowden over one hundred years ago in Ontario. By asserting its paramount right to possession, Canada Life got the right to terminate the subsequent lease in favour of Goodyear and gave Goodyear the right to walk from its subsequent lease obligations. Such a result apparently is only possible when the mortgage has priority over the lease. So, the mortgagee would take title subject to the lease, if the Goodyear lease had priority.TenancyThe Goodyear lease was not terminated in December 1994 by Canada Life or Goodyear. Continuing as usual, Canada Life demanded rent, which Goodyear paid from January of 1995. Following the decision in Corbett v. Plowden, in the absence of an express agreement as to the term of the lease between the mortgagee and the tenant, the court could impose an annual tenancy on Canada Life and Goodyear, which could be terminated by six months notice. Thus, there was no dispute that the law in Corbett v. Plowden was good law in Ontario.

Assignments of Leases: Goodyear, A Case in Review

Goodyear v. BurnhamthorpeGoodyear was the tenant under a long-term ground lease of part of an office building in Etobicoke, known as 10 & 21 Four Seasons Place, where the original landlords were Four Twenty-Seven Investments Limited (“427”) and Saracini Investments Ltd. (“Saracini”). When Goodyear entered into its lease in 1980, Aetna Canada held a first and second mortgage on the property, which went on in 1979. Hence, the Goodyear lease was subsequent in priority to the Aetna mortgage. When Aetna put its mortgage on the property, it wanted the owners 427 and Saracini to assign to it as collateral security for the benefit of any future leases entered into by 427 and Saracini. Goodyear was not a party to the assignment of leases at that time. Despite the assignment, Goodyear paid its rent under the original Goodyear lease to 427 and Saracini. The assignment of leases to Aetna was made in the belief that any future lease including the original Goodyear lease would be assigned to the lender as collateral security for the loan, since the original Goodyear lease was a long-term lease. Goodyear naturally wanted to protect its security of tenure and entered into a non-disturbance agreement with Aetna. According to this non-disturbance agreement, Aetna would not re-enter and take possession of the demised premises so long as Goodyear was paying rent to Aetna. The non- disturbance agreement also contained attornment language stating Goodyear would attorn to Aetna and create privity between Goodyear and Aetna.

Assignment of Rents: Potential Conflicts and Exceptions

In the previous instalment, we discussed the difference between lease and rents and left open the manner of their registration. It is a fait accompli that an assignment of rents could be registered in Land Titles. As the right to get rents is a chose in action, it has to be registered under the P.P.S.A. With regard to an assignment of leases, it could and should be registered normally, because the lease is a property interest. It follows therefore that it cannot be registered under the P.P.S.A.Conflicts So, the question is whether or not to register an assignment of rents against the land. That is when conflicts with the P.P.S.A. begin. Because an assignment of rents is a chose in action and the right to receive rent is personal property, it can be registered under the P.P.S.A. Theoretically, under the P.P.S.A, an assignment of leases being an assignment of a contract as security for a loan can also be registered. This is contradicted in Section 4(1) of the P.P.S.A., which states that it does not apply to an assignment of an interest in real property, including a lease of real property. Hence, an assignment of leases cannot be registered under the P.P.S.A. and priority would not be affected by such registration if carried out after all. Priority would be affected by land registrations only.

COMMERCIAL LEASING: Careful Consideration of Clauses

Renewals and Extensions are quite important in C. L., as can be seen from the case histories below.Saskatchewan Ltd. v. NelsonIn this case, a lease was taken by the former landlord and the tenant for a term commencing in March 2001, and ending February 2006.The lease had an option to renew for one further period of five years on the same terms and conditions as existing with the exception of annual rent, which was to be agreed between the parties. In 2005,

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