Legal Blog

CPL

A certificate of pending litigation (CPL) ensures that, while litigation affecting land is in progress, the landowner cannot sell or mortgage the very land that is in dispute. To be able to obtain and register a CPL, a claimant must have a reasonable claim to an interest in the land (section 103 of the Courts of Justice Act). A CPL may be obtained on motion without notice (Rule 42.01 of the Rules of Civil Procedure) and, if there is an apparent claim for an interest in land, it is not overly difficult to obtain a CPL. The real fight ensues when the landowner is notified, as required by the Rules, that the land has now been bound by the CPL. Such was the case in Multani Custom Homes Ltd. v. 1426435 Ontario Ltd, (2013) 33 R. P. R. (5th) 163 (Ont SCJ).

Deal

Developer and owner of industrial property entered into an agreement of purchase and sale. For a variety of reasons, the closing date was extended a number of times. On each occasion, time of the essence was maintained. During this process, developer was doing a significant amount of preliminary work regarding re-zoning and environmental assessments.

The final closing date was set for February 29, 2012. However, as a result of “a series of events beyond the control of (developer)”, developer was unable to close until March 1, 2012. Owner refused to complete the transaction after February 29, 2012, relying on the time of the essence clause.

Developer obtained a CPL on motion without notice. Owner, on a motion for summary judgment, moved to dismiss the action or, in the alternative, to discharge the CPL.

Good Faith

Owner argued that it was entitled to rely on the time of the essence clause; since developer was unable to close on the closing date, developer’s action should be dismissed summarily. Developer claimed that owner had acted in bad faith and refused to close merely because it felt that its land had appreciated in value.

The judge agreed that owner had been able and willing to close the transaction as scheduled, but refused to do so once the completion date had come and gone. The judge noted that neither party led any evidence as to why owner would not close the next day. The judge also stated that owner would have suffered no prejudice in closing the transaction the next day.

The judge reviewed the law and set out the following principles:

1. A vendor is under a duty to act in good faith to take all reasonable steps to complete the contract. If a vendor acts in bad faith in its performance of the contract, the law precludes the vendor from relying on the time of the essence provision to terminate the contract.

2. A vendor of land must not be arbitrary, capricious, or unreasonable in exercising its termination powers. In particular, the vendor may not act in bad faith.

3. The trend of recent cases is to apply standards of reasonableness and good faith in determining what remedies are available to an innocent party and when they are available.

Developer alleged that, at some point during the course of the agreement, owner’s commitment to complete the agreement changed; owner decided to re-sell the property at a higher price based on developer’s significant efforts in preparing the land for development and a perceived increased value of the property. The judge agreed that these were triable facts demonstrating a genuine issue for trial that should be dealt with at trial.

The judge therefore dismissed the motion to dismiss developer’s action.

Vacate

The judge stated that developer was in the business of buying land, building houses on it, and then selling the houses for profit. The CPL issue hinged on whether developer would have been able to obtain an order for specific performance. If not, then it would never have a claim for an interest in the land and there would be no reason to allow the continuation of the CPL registration.

In order to obtain specific performance of an agreement of purchase and sale for land, a party has to demonstrate that the land is unique. If it is not, then damages are an appropriate remedy for a breach of the agreement.

Not surprisingly, developer argued that the property was unique and that there were no other properties like it in the same area. It also argued that its employees and tradespeople would be employed in the development for approximately two years and that termination of the development would cause intangible damage that could not be readily calculated.

These arguments did not impress the judge. He stated the following:

1. The onus, in this case, was on developer to persuade the judge that the property was unique, of particular importance to developer, and with no readily available substitute. Uniqueness requires proof.

2. The only evidence about the uniqueness of the property was set out in developer’s argument. The judge found that it was a self-serving statement to which the judge gave little weight. Developer could have provided expert evidence of the uniqueness of the property – if that evidence existed – but developer did not do so.

3. Even if real estate, in itself, could be characterised as unique (and it no longer can be characterised in this manner), the principle will not apply when land is purchased merely as an investment. Any loss of profits can be compensated in damages.

The judge therefore vacated the CPL. Owner still had a lawsuit on its hands, but could deal with the property as it wished.

Considerations

Developer sought the CPL to remove owner’s ability to deal with the land. Developer might have used this tactic for two reasons: (i) developer actually needed those lands and there were no other lands to develop; and (ii) by foreclosing any opportunity for owner to sell the lands during the currency of the litigation, owner might have been forced to deal with developer and ultim
ately sell the lands to developer, although not necessarily for the same price as in the original agreement. The second reason was probably more likely than the first.

In order to balance the interests of a landowner and a claimant, the Courts of Justice Act (section 103 (4)) provides that a claimant, who obtains and registers a CPL but is ultimately unsuccessful in its action, is liable for any damages sustained by any person as a result of the CPL registration.

Over the years, we have seen the values of land increase and decrease significantly. Assume that a claimant registered a certificate of pending litigation in 1988, but had its action dismissed in 1991. That claimant could have been liable for a very large award of damages; the value of property plummeted by about 40% over those 3 years.

We often obtain and register a CPL as part of a fraudulent conveyance action. Once we are alleging that, for example, a judgment debtor fraudulently conveyed land to a 3rd party, we do not want to put the 3rd party in a position in which it can sell or mortgage the land to defeat the action.

Image courtesy of Flikr, Creative Commons.

 

Written by Jonathan Speigel Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.