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9th Annual Real Estate Law Summit: The Use, Misuse and Abuse of Restrictions and Restrictive Covenants

  • Event Date April 18, 2012

Speaker: Ray Mikkola

The common law of restrictive covenants shares a common if somewhat shrouded history with the law of easements. Like easements, restrictive covenants can “run with the land” if properly constituted, and it is only this magical legal opportunity to bind as yet unknown and future owners of the burdened lands to the burden of the restrictive covenant (who therefore have not bound themselves by privity of contract) that makes the burden worth registering on title.  But if the two share a common ancestry, the similarity in large measure ends there. While easements have, likely from the outset, become recognized as an interest in real property, it seems that we are left to guess at the precise manner in which the burden of covenants was originally taken to run with the lands, and there are no medieval lawyers left to ask. The misty legal origin of restrictive covenants has resulted in an incomplete understanding of the prerequisite to the current creation of these important documents by contemporary real estate lawyers. The confusion of modern lawyers is compounded by the use, sometimes, of “restriction” and “restrictive covenants” interchangeably, though the two are distinctly different concepts and are dealt with in separate sections of the Land Titles Act. The “restriction” used in this paper is intended to refer to an instrument whereby an owner of land agrees that no transfer or charge (or transfer of charge) may be registered except upon the satisfaction of certain conditions and the securing of a consent from some third party.  Both are valuable instruments for the use of the real estate bar. Care needs to be exercised to distinguish one for the other and to avoid misusing them by failing to do so, to ensure that they are prepared in a legally enforceable manner, and to avoid using them in a manner which they were never intended to operate.

Restrictive Covenants:  Use

Section 119 of the Land Titles Act deals with restrictive covenants and their registration.  I suggest that whenever you draft a restrictive covenant, you have section 119 open to ensure that you do not afoul of its requirements.  In large measure, I believe that section 119 codifies the most common features of the common law of restrictive covenants.

Restrictive covenants may be employed when an owner agrees that the owner’s land or a specified part thereof is not to be built upon, or is not to be used in a particular manner, or that the owner’s land will be subject to “any other condition or restriction running with or capable of being legally annexed to land”.  That last part is important, because it is there that the “magic” of the restrictive covenant may be employed. Properly constructed, the restrictive covenant will “run with the land” so that subsequent transferees of the burdened lands will be bound automatically by its provisions notwithstanding the absence of privity of contract.  Also, once properly prepared and registered, restrictive covenants will survive a tax sale (see section 379(7) of the Municipal Act, 2001 – a similar provision was included in the old Municipal Tax Sales Act).  A valid restrictive covenant can be used to create a private “zoning” scheme for land which can validly impose additional restrictions over and above the municipal zoning by-laws and other development controls (in Ontario – but see section 61 of the Nova Scotia Land Registration Act, which requires, in a limited way, restrictive covenants to be consistent with zoning by-laws).

The Land Titles Act provides that a restrictive covenant may be included in a transfer, or it may be registered as an application signed by the registered owner.  You will have likely noticed that some restrictive covenants that had been registered prior to conversion to electronic registration of titles include a “Z” indicator in front of the Instrument number in order to distinguish the restrictive covenant from the transfer.  This enables the restrictive covenant to continue to be shown as affecting the land even after the registration of a subsequent transfer.  I am advised by the Ministry that the registration of a restrictive covenant as part of a transfer is no longer permitted in the electronic environment.  I have used an application appended to which is a restrictive covenant agreement and which has been signed by the registered owner, which has been satisfactory for registration.

It is not my intention to review all of the legal requirements associated with the drafting and creation of a valid restrictive covenant, but I note the following basic requirements for registration as set out in section 119(4) of theLand Titles Act:

(a)the covenantor must be the owner of the land to be burdened by the covenant;

(b)the covenantee must be a person other than the covenantor;

(c)the covenantee must own land to be benefitted by the covenant and that land must be mentioned in the covenant; and

(d)the covenantor must sign the application to assume the burden of the covenant.

However, the restrictive covenant must also be otherwise legally binding (for example, it must be negative in nature), since the acceptance for registration of the restrictive covenant does not of itself validate an otherwise void restrictive covenant (see Section 119 (6) of the Land Titles Act).

Restrictive Covenants:  Misuse

Restrictive covenants that impose positive obligations constitute, in my experience, the most common misuse of a restrictive covenant.  The Amberwood case (Amberwood Investment Limited v. Durham Condominium Corporation No. 123, 50 RPR (3d) 1 (OCA)) is good authority for the proposition that a positive covenant will not run with title.  Also, if an otherwise positive covenant is expressed in negative terms (“Party A covenants that it will not fail to clear the snow from the common driveway forthwith after a snowfall”) the restrictive covenant will not be enforceable (even if registered).

Not unlike easements, the restrictive covenant must set out the burdened and benefitting lands, and the failure to do so is very likely fatal.

The restrictive covenant should in some manner restrict the use to which the burdened lands may be put or in some fashion restrict or limit the manner in which it may be improved.  A restriction on height or use is common.  A restriction on where an owner may buy his clothing is likely not enforceable unless it may be demonstrated to have some connection to the burdened lands.

It appears that the party which seeks to take the benefit of the restrictive covenant must be the owner of the benefitting lands.  While it is not clear to me that at common law the benefitting party must have a fee simple interest in the benefitting land (rather than, for example, a leasehold interest), section 119 (4) of the Land Titles Act makes it a registration requirement that the covenantee must own the benefitting land.

The failure to include a time limit for the operation of the restrictive covenant does not appear to be a mandatory registration requirement, and the Land Titles Act deems any restrictive covenant that is not time limited to expire after 40 years.

Restrictive Covenants:  Abuse

The terms of a restrictive covenant may be challenged pursuant to the authority set out in section 61 of theConveyancing and Law of Property Act, as follows:

61. (1) Where there is annexed to land a condition or covenant that the land or a specified part of it is not to be built on or is to be or not to be used in a particular manner, or any other condition or covenant running with or capable of being legally annexed to land, any such condition or covenant may be modified or discharged by order of the Superior Court of Justice. R.S.O. 1990, c. C.34, s. 61 (1); 2006, c. 19, Sched. C, s. 1 (1).

Typical challenges include the failure of the restrictive covenant to comply with the mandatory requirements of theLand Titles Act or the common law, and would include restrictive covenants against public policy.  An appeal lies to Divisional Court.

Restrictions Under Section 118 of the Land Titles Act:  Use

Restrictions under the Land Titles Act are entirely different from restrictive covenants.  Section 118 provides as follows:

118.  (1)  Where the registered owner of freehold or leasehold land or of a charge desires to impose restrictions on transferring or charging the land or charge, the registered owner may apply to the land registrar to make an entry on the register that no transfer shall be made or charge created unless the following things, or such of them as the owner determines, are done:

1. Notice of an application for a transfer or for the creation of a charge is transmitted by registered mail to such address as the registered owner specifies to the land registrar.

2. The consent of some person or persons, to be named by the registered owner, is given to the transfer or the creation of a charge.

3. Some other matter or thing is done as is required by the registered owner and approved by the land registrar. R.S.O. 1990, c. L.5, s. 118 (1).

Land registrar to enter restrictions in register

(2)  If the land registrar is satisfied of the right of the applicant to impose such restrictions, he or she shall make a note of them on the register and no transfer shall be made or charge created except in conformity therewith. R.S.O. 1990, c. L.5, s. 118 (2).

Discretion of the land registrar

(3)  The land registrar is not required to enter a note of a restriction, except upon such terms as to payment of the fees and otherwise that are required, or to enter a note of a restriction that he or she considers unreasonable or calculated to cause inconvenience. R.S.O. 1990, c. L.5, s. 118 (3); 1998, c. 18, Sched. E, s. 144.

Restrictions may be withdrawn or set aside

(4)  Any such restriction may at any time be withdrawn or modified at the instance of all the persons for the time being appearing by the register to be interested in the restriction, and is also subject to be set aside by the court. R.S.O. 1990, c. L.5, s. 118 (4).

Note that section 118 of the Land Titles Act essentially allows an owner of property to agree that it will put its authority to transfer or charge the property in the hands of another person. The owner of a charge may also prohibit its transfer except on consent of another person.  It has nothing to do with the use of the property which is subject to the restriction, there is no time limit, and the person exercising the right to consent or not to consent need not be an adjacent owner or have any connection to the land affected by the restriction.  Unless the person who is required to consent gives such consent, the owner may not charge or transfer its land, or as applicable, the owner of the charge may not transfer the charge.

This section grants significant authority to the consenting party to exercise almost limitless authority over the lands of another. There is no restriction on the party whose consent is required to withhold its consent, although there does not appear to be any reason why the parties could agree that the consent must be given on the occurrence of some event or upon the satisfaction of some obligation. I have used a restriction in circumstances where a bankrupt was disputing our claim that he was insolvent, and in consideration for our agreeing to an adjournment of the bankruptcy hearing the owner agreed to register a restriction on title to his property pending the hearing.

Restrictions Under Section 118 of the Land Titles Act:  Misuse

The most significant misuse of restrictions occurs, in my experience, when solicitors confuse section 118 restrictions with section 119 restrictive covenants, although they are entirely different documents.  The former is entirely a creation of statute, whereas the latter is principally a creation of the common law.

Unlike section 119 restrictive covenants, the Land Titles Act has given the Land Registrar some discretion regarding the acceptance of restrictions.  It isn’t clear to me as to how this discretion may be exercised, as the typical restriction is drafted in very simple language which merely requires the consent of the named person, failing which no transfer or charge may be registered.

In any event, where the restriction does not comply with the requirements of section 118, the owner may not have recourse to section 61 of the Conveyancing and Law of Property Act, as it does not mention restrictions (see above).

Restrictions Under Section 118 of the Land Titles Act: Abuse

Recently, I came across a restriction which had been registered on title to property which prohibited the registration of any deed, charge “or encumbrance” without the consent of the neighbouring property owner, who was named in the restriction.  The purpose of the restriction was to attempt to prevent the registration of a construction lien.  The Land Registrar accepted the registration of the construction lien even in the face of the restriction.  Similarly, requiring that consent is required for other dealings with the property, such as the registration of leases, options to purchase, notices, or documents other than transfers or charges (or transfer of charges) is not authorized under section 118.  I expect that a purchaser registering a sale under mortgage under a charge that pre-existed the registration of the restriction should be entitled to do so, but the complete absence of any case law on section 118 requires us to analyze these matters on the basis of legal principles alone.

Conclusion

The most important messages in this paper are as follows:

1.Do not confuse “restrictions” under section 118 of the Land Titles Act with restrictive covenants under section 119 of the Land Titles Act.

2.Great care must be exercised in the drafting of either, but in particular with restrictive covenants, which must comply with the common law and section 119 of the Land Titles Act in order to be valid and to be accepted for registration.

3.Both restrictions and restrictive covenants can be extremely powerful and useful documents.  The failure to use section 118 restrictions more frequently in practice is surprising.

I have appended sections 118 and 119 of the Land Titles Act to this paper.

 

Ray Mikkola
March 29th, 2012

Appendix

Land Titles Act

118.  (1)  Where the registered owner of freehold or leasehold land or of a charge desires to impose restrictions on transferring or charging the land or charge, the registered owner may apply to the land registrar to make an entry on the register that no transfer shall be made or charge created unless the following things, or such of them as the owner determines, are done:

1. Notice of an application for a transfer or for the creation of a charge is transmitted by registered mail to such address as the registered owner specifies to the land registrar.

2. The consent of some person or persons, to be named by the registered owner, is given to the transfer or the creation of a charge.

3. Some other matter or thing is done as is required by the registered owner and approved by the land registrar. R.S.O. 1990, c. L.5, s. 118 (1).

Land registrar to enter restrictions in register

(2)  If the land registrar is satisfied of the right of the applicant to impose such restrictions, he or she shall make a note of them on the register and no transfer shall be made or charge created except in conformity therewith. R.S.O. 1990, c. L.5, s. 118 (2).

Discretion of the land registrar

(3)  The land registrar is not required to enter a note of a restriction, except upon such terms as to payment of the fees and otherwise that are required, or to enter a note of a restriction that he or she considers unreasonable or calculated to cause inconvenience. R.S.O. 1990, c. L.5, s. 118 (3); 1998, c. 18, Sched. E, s. 144.

Restrictions may be withdrawn or set aside

(4)  Any such restriction may at any time be withdrawn or modified at the instance of all the persons for the time being appearing by the register to be interested in the restriction, and is also subject to be set aside by the court. R.S.O. 1990, c. L.5, s. 118 (4).

Conditions, restrictions, covenants, etc.

Registration of conditions and restrictions, on application

119.  (1)  Upon the application of the owner of land that is being registered or of the registered owner of land, the land registrar may register as annexed to the land a condition or restriction that the land or a specified part thereof is not to be built upon, or is to be or is not to be used in a particular manner, or any other condition or restriction running with or capable of being legally annexed to land. R.S.O. 1990, c. L.5, s. 119 (1).

Registration of conditions, restrictions and covenants, on transfer

(2)  The land registrar may register as annexed to the land a condition, restriction or covenant that is included in a transfer of registered land that the land or a specified part thereof is not to be built upon, or is to be or is not to be used in a particular manner, or any other condition, restriction or covenant running with or capable of being legally annexed to land. R.S.O. 1990, c. L.5, s. 119 (2).

Registration of covenants, on application

(3)  Upon the application of the owner of land that is being registered or of the registered owner of land, the land registrar may register as annexed to the land a covenant that the land or a specified part thereof is not to be built upon, or is to be or is not to be used in a particular manner, or any other covenant running with or capable of being legally annexed to land. R.S.O. 1990, c. L.5, s. 119 (3).

Idem

(4)  A covenant shall not be registered under subsection (3) unless,

(a) the covenantor is the owner of the land to be burdened by the covenant;

(b) the covenantee is a person other than the covenantor;

(c) the covenantee owns land to be benefitted by the covenant and that land is mentioned in the covenant; and

(d) the covenantor signs the application to assume the burden of the covenant. R.S.O. 1990, c. L.5, s. 119 (4).

Notice and modification or discharge of covenants

(5)  The first owner and every transferee, and every other person deriving title from the first owner, shall be deemed to be affected with notice of such condition or covenant, but any such condition or covenant may be modified or discharged by order of the court on proof to the satisfaction of the court that the modification will be beneficial to the persons principally interested in the enforcement of the condition or covenant. R.S.O. 1990, c. L.5, s. 119 (5).

Covenants or conditions running with land

(6)  The entry on the register of a condition or covenant as running with or annexed to land does not make it run with the land, if such covenant or condition on account of its nature, or of the manner in which it is expressed, would not otherwise be annexed to or run with the land. R.S.O. 1990, c. L.5, s. 119 (6).

Subsequent transfers

(7)  Where a condition or covenant has been entered on the register as annexed to or running with land and a similar condition is contained in a subsequent transfer or a similar covenant is in express terms entered into with the owner of the land by a subsequent transferee, or vice versa, it is not necessary to repeat the condition or covenant on the register or to refer thereto, but the land registrar may, upon a special application, enter the condition or covenant either in addition to or in lieu of the condition or covenant first mentioned. R.S.O. 1990, c. L.5, s. 119 (7).

Removal of entry of condition or covenant from register

(8)  Where a condition or covenant has been entered on the register as annexed to or running with land for a fixed period and the period has expired, the land registrar may, at any time after ten years from the expiration of the period, remove the entry from the register. R.S.O. 1990, c. L.5, s. 119 (8).

Condition, etc., expires after 40 years

(9)  Where a condition, restriction or covenant has been registered as annexed to or running with the land and no period or date was fixed for its expiry, the condition, restriction or covenant is deemed to have expired forty years after the condition, restriction or covenant was registered, and may be deleted from the register by the land registrar. R.S.O. 1990, c. L.5, s. 119 (9).

Effect of conditions and restrictions

(10)  Where a condition or restriction has been registered as annexed to land, the condition or restriction is as binding upon any person who becomes the registered owner of the land or a part thereof as if the condition or restriction had been in the form of a covenant entered into by the person who was the registered owner of the land at the time of the registration of the condition or restriction. R.S.O. 1990, c. L.5, s. 119 (10).

Exceptions

(11)  The following provisions do not apply to a covenant or easement established under the Agricultural Research Institute of Ontario Act:

1. Clause (4) (c).

2. The rule with respect to modification and discharge of covenants in subsection (5). 1994, c. 27, s. 7.

Same

(12)  The following provisions do not apply to a covenant or easement entered into or granted under the Conservation Land Act or under clause 10 (1) (c) or section 37 of the Ontario Heritage Act:

1. Clause (4) (c).

2. The rule with respect to modification and discharge of covenants in subsection (5).

3. Subsection (9). 2006, c. 23, s. 33; 2009, c. 33, Sched. 11, s. 4.

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