THE COURT OF APPEAL FOR SASKATCHEWAN Citation: 2006 SKCA Date: 20060124 Between: Docket: 1145 R.M. of Chaplin No. 164 and Farm Credit Canada Coram: Bayda, C.J.S., Lane Smith, JJ.A. Counsel: Tyler McCuaig for the R.M. of Chaplin No. 164 Joel A. Hesje, Q.C. for Farm Credit Corporation Appeal: From: Q.B. No. 122 of 2003, J.C. Moose Jaw Heard: November 22, 2005 Disposition: Dismissed Written Reasons: January 24, 2006 By: The Honourable Madam Justice Smith In Concurrence: The Honourable Chief Justice Bayda The Honourable Mr. Justice Lane Smith, J.A. [1] This is an appeal brought by the R. M. of Chaplin No. 164 (hereafter “the R.M.”) from a judgment of the Court of Queen’s Bench determining that a mortgage held by the R.M. was subordinate to a mortgage held by the respondent, Farm Credit Canada (hereafter “FCC”), even though the R.M. mortgage was registered before the mortgage of FCC.  The R.M. had agreed with the mortgagor that its mortgage would be subordinate to that of FCC. The appeal raises the application of the priority provisions of The Land Titles Act, 2000, S.S. 2000, c. L-5.1 ("LTA"), and, in particular, the application of s. 54 of that Act. [2] Mainline Pulse Inc. (“Mainline”) was incorporated and developed to operate specialty crop processing plant in Chaplin, Saskatchewan on the site of former Saskatchewan Wheat Pool elevator located on railway right-of-way owned by Canadian Pacific Railway (“the CPR”) and leased to the Wheat Pool. On July 1, 2001, Mainline entered into lease agreement with the CPR in relation to this land. Around September 12, 2001 Mainline agreed to purchase the elevator from the Wheat Pool and to purchase the land from the CPR. Because this required subdivision of the land owned by the CPR, Mainline continued to lease the land from the CPR until the subdivision could be completed. Following subdivision of the land, title to the newly created surface parcel was registered in the name of Mainline on January 18, 2002. [3] The construction of the processing plant was largely financed through loan of $3,125,000 provided to Mainline by FCC. To secure this loan, FCC and Mainline entered into leasehold mortgage in favour of FCC dated July 26, 2001 and registered in the Land Titles Office on September 20, 2001 against the subject land, then owned by CPR. At the same time, fee simple mortgage was executed, but not registered, as the land had not yet been subdivided and Mainline did not yet have fee simple interest. The leasehold mortgage continued as first registered interest against the new fee simple title subsequently issued to Mainline, but FCC's fee simple mortgage was not registered until April 24, 2002. This second mortgage secured the same monies advanced by FCC to Mainline as was secured by its leasehold mortgage. [4] In the meanwhile, on August 1, 2001, the R.M. and Mainline executed Grant Agreement outlining the terms upon which financing in the maximum sum of $150,000 was to be provided to Mainline by the R.M. This agreement provided in part as follows: The Rural Municipality of Chaplin ("R.M.") has approved the application of Mainline Pulse Inc. (the "Corporation") for grant aid in the maximum sum of $150,000.00 (the "Grant"). Set out below are the terms and conditions upon which the R.M. is prepared to make the grant to the Corporation. Security As security for the payment of all amounts required to be paid under this Grant Agreement and the performance of all of the Corporation's obligations under this Grant Agreement, the Corporation shall provide the security more particularly described in the attached Schedule "A" Security (the "Security") and such Security shall, among other things, mortgage and grant security interest in all the Corporation's real or personal property. The R.M. security shall be subject to the following: a) Farm Credit Corporation's security, the primary lender; b) CIBC's security, who are providing the operating money. [Appeal Book, pp. 62a-63a] Schedule "A" to the agreement provided in part as follows: The Corporation shall provide the following security pursuant to Section of the Grant Agreement, in form and substance satisfactory to the R.M.: 1. The R.M. hereby agrees to postpone in favour of Farm Credit Corporation supplying the primary monies to implement the project in an amount not to exceed $3,125,000.00 and the Canadian Imperial Bank of Commerce regarding its operating loan. [Appeal Book, p. 68a] [5] Subsequently, the R.M. advanced funds to Mainline and secured this loan with fee simple mortgage executed on September 12, 2001. Mainline was registered as the owner of the former CPR land on January 18, 2002 and the R.M. mortgage was registered against Mainline’s fee simple interest in this land on January 28, 2002. [6] The R.M.'s fee simple mortgage was thus registered subsequent to FCC’s leasehold mortgage, but prior to FCC’s fee simple mortgage in the subject land. [7] Paragraph of the R.M. mortgage provided as follows: WHEREAS MAINLINE PULSE INC., company duly incorporated under the laws of the Province of Saskatchewan, having its registered office at #600, 123 2nd Avenue S. Saskatoon, Saskatchewan S7K 7E6 (hereinafter called the "Mortgagor") has agreed to borrow the principal amount of ONE HUNDRED FIFTY THOUSAND ($150,000.00) Dollars from R.M. OF CHAPLIN NO. 164, rural municipality with its registered office at Box 60, Chaplin, Saskatchewan S0H 0V0, (hereinafter sometimes referred to as "the R.M." or the "Mortgagee") pursuant to certain agreement executed by the R.M. on August 1, 2001 and by the mortgagor on May 24, 2001, between the Mortgagor and R.M. (hereinafter, including all amendments thereto from time to time, called the "Grant Agreement"). AND WHEREAS it is condition of the Grant Agreement that the Mortgagor execute this Mortgage for the better securing of the R.M. [Appeal Book, p. 41a] [8] Mainline became insolvent and ceased operations in November, 2003. FCC commenced the action to foreclose its two registered mortgages against the subject land. An issue arose as to whether the R.M. had an interest in the mortgaged land in priority to the interest of FCC. II. The Judgment Below [9] The trial judge held that the leasehold mortgage gave FCC no enforceable rights against Mainline’s fee simple interest in the mortgaged property, reasoning that the transfer of the fee simple title to the land to Mainline by the CPR effectively terminated the lease, leaving no interest to which the leasehold mortgage could attach. [10] However, she found that, despite its registration subsequent to the R.M. mortgage, FCC’s fee simple mortgage had priority to the fee simple mortgage of the R.M. as result of the R.M.’s covenant, in the Grant Agreement, to postpone its security interests to those of Mainline. In coming to that conclusion, she relied substantially on the decision in Royal Trust Co. v. H.A. Roberts Group Ltd., 1995 CanLII 6094 (SK QB), [1995] W.W.R. 305. This case involved mortgage priority dispute between the CIBC and Royal Trust. Although Royal Trust had registered its interest prior to the CIBC interest, Royal Trust had agreed with the mortgagor that its interest would be subordinate to mortgages granted by the mortgagor for certain purposes. CIBC’s interest was said to fall within the subordination clause. Baynton, J. held that the CIBC interest had priority, finding that the subordination agreement effectively displaced the rules in the LTA relating to registration and priority. He commented: [69] The provisions of these statutes do not prevent or preclude the parties from contracting to change the statutory order of priorities between themselves. Postponements of mortgages (i.e. subordination of one security to another), are common in commercial practice and effectively alter the priorities between the parties that would otherwise pertain under the applicable registration system in the jurisdiction. [11] Royal Trust argued that CIBC was barred by the principle of privity of contract from relying on the postponement agreement between Royal Trust and its mortgagor. Baynton J. addressed this argument as follows: [70] CIBC is not privy to the trust deed executed by Roberts and Royal Trust. But in my view CIBC is not attempting per se to enforce the trust deed. Rather it is simply resisting the attempt of Royal Trust to take prior security position to that of CIBC that is inconsistent with what Royal Trust has declared and agreed to in the trust deed respecting the priority of the respective securities. Although no authority was cited to me on this point, doubt that the privity of contract principle can provide litigant with immunity from the consequences of subordination provision he or she has agreed to in writing and that affects the priority of third party's security. [71] This is especially so in cases like the one before me where the subordination provisions were designed to protect the prior position of third party, in this case the banker of one of the parties to the trust deed. Royal Trust knew that third party in the position of CIBC did and would place substantial reliance on such subordination provisions. This lawsuit is to determine the priorities of the respective securities. It is not an action by CIBC to enforce the trust deed. [72] In any event if the principle of privity of contract does apply to this case, the circumstances constitute statutory exception. See Alberta (Attorney General) v. Samuel Doz Professional Corp. 1993 CanLII 7049 (AB QB), [1993] W.W.R. 260 (Alta. Q.B.), and J.E. Coté, An Introduction to the Law of Contract (Edmonton: Juriliber Limited, 1974), at p. 166. [12] The trial judge concluded: [59] I would have to conclude on the basis of the above authorities that the second FCC Mortgage has priority over the R.M. Mortgage, as the R.M. specifically agreed to a postponement in favour of FCC. Third parties are not affected, and the M. should not be permitted to have its interests advanced over those of FCC by virtue only of prior registration. [2005 SKQB 175] III. The Relevant Statutory Provisions [13] The following provisions of the LTA are relevant: Reliability of title 23(1) person taking or proposing to take from registered owner transfer or an interest in land or dealing with title: (a) is not bound: (i) to inquire into or ascertain the circumstances in or the consideration for which the registered owner or any previous registered owner acquired title; or (ii) to see to the application of the purchase money or any part of the purchase money; and (b) notwithstanding any law to the contrary but subject to sections 18 and 35, is not affected by any direct, implied or constructive notice of: (i) any trust; (ii) any other unregistered interest; or (iii) any unregistered transfer. (2) Knowledge on the part of the person that any trust or other unregistered interest or any unregistered transfer is in existence must not of itself be imputed as fraud. Reliability of interest 24(1) person taking or proposing to take an interest in title or in another interest for the purpose of obtaining priority over any other trust or unregistered interest is not bound to inquire into and, subject to sections 18 and 35, is not affected by any direct, implied or constructive notice of any trust or any other unregistered interest. (2) Knowledge on the part of the person that any trust or other unregistered interest is in existence must not of itself be imputed as fraud. Effect of interest registration 54(1) After an interest is registered and until that interest is exhausted or until the registration of that interest expires, lapses or is otherwise discharged from the land titles registry in accordance with this Act: (a) the title on which that interest is based and any title derived from that title remains subject to that interest; and (b) any supporting interest on which that interest is based remains subject to that interest notwithstanding any assignment of the supporting interest. (2) Subject to subsections (5) and (7), registration of an interest constitutes notice of the interest to third parties and gives the interest holder priority over third parties in accordance with section 27. (3) Any interest registered pursuant to subsection 53(1) is only effective according to the terms of the instrument or law on which the interest is based and is not deemed to be valid through registration. (4) No registration of an interest is effective if: (a) the application for registration of the interest was not eligible for submission pursuant to section 50; or (b) the instrument on which the interest is based was not executed before the interest was registered. (5) With respect to registration of an interest mentioned in clause 50(1)(a) or (c), the notice and priority mentioned in subsection (2) apply only for the rights expressly: (a) described in the application; or (b) described in an attachment to the application. (6) Where an attachment is provided pursuant to clause (5)(b) or by an amendment to the registration, the attachment displaces the description of the interest in the application as notice of the interest to third parties from the time the attachment is provided in an application for registration. (7) The registration of an interest mentioned in clause 50(1)(b) is not effective unless any form prescribed pursuant to the Act or Act of the Parliament of Canada creating the interest is provided as an attachment to the application. (8) With respect to an interest mentioned in clause 50(1)(b), the notice and priority mentioned in subsection (2) is for the interest as described in the application to the extent that the interest is defined by the Act or Act of the Parliament of Canada, whether or not an attachment, other than the attachment mentioned in subsection (7), is provided. [14] The appellant argues that the decision of the trial judge is inconsistent with the priority provisions of the LTA, and that permitting the respondent to enforce the covenant to postpone contained in the Grant Agreement between the appellant and Mainline violates the principle of privity of contract. It concedes that, at the time its mortgage was created, it had full knowledge of the respondent’s prior in time, but as yet unregistered, security interest in Mainline’s prospective fee simple interest in the subject land, and that it therefore never expected to be able to enforce its security interest in the subject land in priority to the much larger claim of the respondent. It argues, however, that knowledge of prior but unregistered interest is irrelevant to the priority obtained by prior registration, absent fraud, which is not alleged in this case. [15] On the question of privity of contract, the appellant argues that its situation is distinguishable from that described by Baynton J. in Royal Trust, for, in the instant case, the respondent did not even know about, and certainly did not rely upon, the covenant in the Grant Agreement between the appellant and Mainline, when it advanced funds to Mainline. V. Analysis and Conclusion [16] It is our view that it is not in this case necessary to consider whether the priority provisions of the LTA are, as general rule, overridden by commercial postponement agreements in mortgages, or whether reliance by the competing security holder is necessary in order to displace the doctrine of privity of contract in relation to covenant to postpone, for we consider the matter to be governed by consideration of the nature of the interest created by the R.M. mortgage, in light of s. 54(3) of the LTA. [17] As cited above, s. 54 (3) provides as follows: 54(3) Any interest registered pursuant to subsection 53(1) is only effective according to the terms of the instrument or law on which the interest is based and is not deemed to be valid through registration. [18] In effect, registration, while arguably conclusive on the issues of notice and priority, does not and cannot alter the nature of the legal interest granted by the instrument registered. In the present case, the mortgage instrument states that it is pursuant to the prior Grant Agreement executed by the parties. This agreement, in turn, clearly provides that any security granted by Mainline to the R.M. is subject to the prior security interest of the respondent to the extent of $3,125,000. In effect, Mainline granted to the R.M. a mortgage of a limited interest, viz., Mainline’s equity of redemption after any mortgage held by the respondent, to the extent of $3,125,000. The appellant admits that it was never intended, as between itself and Mainline, that it would obtain a security interest in priority to that of the respondent. Mainline granted a mortgage to the appellant subject to the prior interests, as defined, of the respondent and of CIBC. The appellant is therefore, in effect, seeking to increase the interest actually accorded to it by the debtor by relying on its prior registration and the priority provisions of the LTA. [19] The decision of the Supreme Court of Canada in St. Mary’s Parish Credit Union v. Trademarks Ball Lumber Co., 1961 CanLII 62 (SCC), [1961] S.C.R. 310 is instructive. In that case, one Zirtz borrowed money from the appellant credit union to build his house and assist him in his business. He executed, in favour of the credit union, “pledge of title” by way of equitable mortgage on his house property to secure the advance of $2,000 “and any moneys borrowed” by Zirtz from the appellant. Another $4,400 was subsequently lent to Zirtz by the credit union. The duplicate certificate of title for the land was deposited with the appellant pursuant to this agreement. [20] Subsequent to all of these transactions, Zirtz made purchases of lumber and other building supplies from the respondent and became indebted to it for the purchase price. The respondent asked Zirtz to give charge and mortgage “on his equity in the land” for the sum of $6,000. This was conceded not to be registrable mortgage under The Land Titles Act of Saskatchewan in force at the time, and it, too, was considered an equitable mortgage. The Court accepted that at the time of the granting of this second mortgage, Zirtz told the respondent that there was an existing mortgage against his home for $6,400 in favour of the appellant and that they held the duplicate certificate of title. He also told them the building was worth $15,000 and that he could only use his remaining interest in the property to secure his debt to them. The respondent then filed caveat claiming an interest under the equitable mortgage. [21] Zirtz then executed legal mortgage in favour of the appellant. At the time of registration of this document, the appellant became aware of the respondent’s caveat. Each party then sought declaration that its charge against the land had priority. The trial judge held in favour of the respondent, and this judgment was upheld by the Saskatchewan Court of Appeal, holding: they [the respondent] knew that the title to the property was clear but for three mechanic’s liens, two of them filed by the plaintiff itself,.... They knew that any equitable mortgage held by the Credit Union was unregistered and that it passed no interest until registered and that therefore the equity that Zirtz had to offer as security was the full equity as shown by the title…. [p. 314] [22] The Supreme Court disagreed, on the following analysis, pertinent to the case before us: Up to the time of the filing of the respondent’s caveat the situation was that both the appellant and the respondent had equitable mortgages upon the land. That of the appellant was prior in time to that of the respondent and ranked first in equity. Neither mortgage was in registrable form under the provisions of The Land Titles Act, but the appellant had possession of the duplicate certificate of title for the land. In addition to priority as to time, it seems to me that the appellant’s mortgage ranked ahead of that of the respondent because of the form of the latter mortgage. It appears clear, from the terms of that document and in the light of the evidence, that it was intended to charge, not the whole of the owner’s interest in the land, but only the equitable interest which remained in Zirtz after he had granted to the appellant the earlier mortgage. The respondent’s mortgage, which was drawn by its solicitors, was not drafted as registrable mortgage under The Land Titles Act, but only purported to charge “his equity” in the land. What was that equity? It was the interest which he retained in the land, subject to the appellant’s equitable mortgage. It is true that the appellant’s interest was an unregistered interest, but it did confer rights on the appellant and such rights were enforceable against Zirtz. Several cases in this Court have recognized the validity of equitable interests in lands which are subject to the Torrens system of titles and which are not themselves registrable interests under that system…. [pp. 315-16] In the present case the two equitable mortgages which are in competition are not the same. That of the respondent, by its terms, was expressly limited to charge upon “my equity”. It was, therefore, mortgage of only limited interest in the land. The filing of the caveat gave notice of that interest in the respondent, and any one dealing thereafter with the land could do so only subject to that interest of the respondent, but the filing of the caveat could not and did not increase the extent of the respondent’s interest in the land. It could not create charge upon more than that which had been charged by Zirtz under the terms of the instrument itself. [pp. 319-20] Stated at its highest, the respondent’s position after registration of the caveat could only be the same as if the equitable mortgage itself could have been and had been registered as an instrument under the Act. According to the tenor and intent of that document it only constituted mortgage upon partial interest in the land. For these reasons, therefore, do not agree that, by virtue of the filing of its caveat, the respondent obtained, under the provisions of The Land Titles Act, priority over the prior equitable interest of the appellant. [p. 320, Italics added] [23] The facts in the present case are distinguishable in that the mortgage created in favour of the R.M. in this case was, indeed, registrable mortgage, and, moreover, it did not, on its face, limit the interest mortgaged to the “equity” of the mortgagor. It is therefore arguable, in the case at bar, that, had third party assumed the registered interest of the respondent, that party would have been entitled to assume that the R.M. mortgage charged the unlimited fee simple interest of the mortgagor and was not subject to any unregistered security interest, whether or not such an interest was prior in time or in equity. We do not have to decide this issue, as no third party interest was created or is before us. [24] In other respects, however, and as between the immediate parties to these transactions, the situations are equivalent. The Grant Agreement is cited in the first paragraph of the R.M. mortgage and the mortgage is clearly intended to be pursuant to the terms of that agreement. The Grant Agreement, in turn, clearly sets out the parties’ intention that the mortgage be subject to the prior security interest of the respondent. The appellant candidly admitted that this was its understanding and its expectation at the time the documents were executed. Thus, the appellant could not, simply by registering the mortgage, create an interest greater than that to which it was entitled by its agreement with Mainline. [25] For these reasons, we concur in the trial judge’s conclusion that the fee simple mortgage of the respondent has priority over the fee simple mortgage of the appellant. The appeal is accordingly dismissed with costs to the respondent. DATED at the City of Regina, in the Province of Saskatchewan, this 24th day of January A.D. 2006. concur BAYDA C.J.S.
This is an appeal brought by the R.M. from a judgment of the Court of Queen's Bench determining that a mortgage held by the R.M. was subordinate to a mortgage held by the respondent Farm Credit Canada (FCC), even though the R.M. mortgage was registered before the mortgage of FCC. The R.M. had agreed with the mortgagor that its mortgage would be subordinate to that of FCC. The appeal raises the application of the priority provisions of The Land Titles Act, 2000 and in particular the application of s. 54 of the Act. HELD: The mortgage of the respondent has priority over the mortgage of the appellant. The appeal is dismissed with costs.  1) It is not necessary in this case to consider whether the priority provisions of the Land Titles Act are overridden by commercial postponement agreements in mortgages, or whether reliance by the competing security holder is necessary in order to displace the doctrine of privity of contract in relation to a covenant to postpone, for the court consider the matter to be governed by a consideration of the nature of the interest created by the R.M. mortgage in light of s. 54(3) of the Act. 2) Registration does not and cannot alter the nature of the legal interest granted by the instrument registered. In the present case the mortgage instrument states that it is pursuant to the prior Grant Agreement executed by the parties. This agreement, in turn, clearly provides that any security granted by Mainline to the R.M. is subject to the prior security interest of the respondent to the extent of $3,125,000. In effect, Mainline granted to the R.M. a mortgage of a limited interest, being Mainline's equity of redemption after any mortgage held by the respondent, to the extent of $3,125,000. The appellant admits that it was never intended, as between itself and Mainline, that it would obtain a security interest in priority to that of the respondent. Mainline granted a mortgage to the appellant subject to the prior interests, as defined, of the respondent and of CIBC. The appellant is therefore, seeking to increase the interest actually accorded to it by the debtor by relying on its prior registration and the priority provision of the Act.