Module 9 - Real Property Interests & Leases

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Readings: McInnes, M., Kerr, I., & VanDuzer, J. A. (2022). Managing the law: The legal aspects of doing business (6 th Edition). Pearson. o Chapter 15: Real Property: Interests and Leases Introduction In this module we will introduce the topic of real property. Generally, real property includes the land, buildings attached, and a reasonable amount of space above and below the land. Historically, real property was the predominate indicator of wealth and status. Over time that has changed, and other types of property have gained importance, such as intellectual property. However, real property is still critically important for commerce and society in general. People still need a physical place to live, and commerce, despite the growth of e-commerce, still requires space for employees to work and collaborate, and buildings to manufacture, store and distribute products. This module will firstly, explore the most common rights in real property known as estates (i.e., possessory interests) and interests (i.e., non-possessory interests), and secondly, discuss leasing. Topics and Learning Objectives Topics This module will cover the following topics:  Interests in Land o Estates in Land o Shared Ownership o Condominiums o Non-Possessory Interests in Land  Leases o Leases: Duration and Assignments o Subleases

o Commercial and Residential Lease Learning Objectives By the end of this module you should achieve the following objectives:  Interests in Land o Identify the different estates in land (fee simple, life estate, leasehold estate) and explain the rights, obligations and limitations associated with each. o Explain the difference between joint ownership (joint tenancy) and co- ownership (tenants-in-common). o Apply the law pertaining to shared ownership (i.e., joint tenancy; tenancy in common) in deciding when it is appropriate to use joint ownership (joint tenancy) and when it is appropriate to use tenancy-in-common. o Apply the law pertaining to the severance of a joint ownership (joint tenancy). Demonstrate an understanding of the different ways to sever a joint ownership (joint tenancy). o Explain the basic characteristics of condominium ownership.  Leases o Identify the different non-possessory interests in land (easement, restrictive covenants, mineral lease, profit à prendre) and explain the rights, obligations and limitations associated with each. o Apply the law pertaining to easements (i.e., creation; running with land; enforcement). o Apply the law pertaining to restrictive covenant (i.e., creation; running with the land; enforcement). o Explain the different available terms (i.e., duration) of a lease. o Explain the difference between an assignment and a sublet. o Explain the landlord’s covenant of “quiet possession”. o Apply the landlord’s remedies for a tenant’s breach of a commercial lease, with particular emphasis upon the unique landlord’s remedies of eviction and distress. o Apply the law of mitigating losses in the context of a tenant default under a commercial lease. o Explain how and why a residential lease varies significantly from a commercial lease.

 Indigenous Interests in Land o Explain the difference between customary interests in land, Aboriginal title, Aboriginal rights and treaty rights o Explain how an impact benefit agreement works o Apply the law regarding the above Indigenous interests in land with respect to whether an impact benefit agreement is required o Identify the significance of reserve land o Explain the difference between a surrender and a designation o Apply the law regarding designation in the context of leasing o Explain how a certificate of possession works o Explain land codes with respect to the First Nations Land Management Act o Explain land tenure under self-government agreements and modern treaties Interests in Land All land in Canada is owned by the government (i.e., the Crown). However, the government has granted private parties some rights to specific parcels of land. It is possible to acquire a “bundle of rights” to land but not to own it absolutely. We will discuss some of the different types of “bundles of rights” that exist, and also some lesser interests in land. You may recall from contract law the privity doctrine that provides that only the parties to a contract are bound to it and only they can enforce those rights against the other party. Interests in land, on the other hand, can be enforced against anyone in the world. We will begin by looking at the most significant interests in land called “estates”. Types of Estates The owner of an estate in real property gets an exclusive right to possess the real property for a period of time. We will look at the following estates:  Fee simple  Life estate

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 Leasehold estate Fee Simple Estate The largest bundle of rights in land is called a “fee simple estate”. This is the most common estate. When a person purchases a home or commercial property they want the best estate, namely fee simple. This estate gives the holder a set of rights to the land, subject to certain limitations. The holder of fee simple has the right to:  Exclusive possession of the land for an indefinite time ;  Sell or gift the fee simple to someone ;  Lease ;  Pass the fee simple after their death ; and  Generally, use and abuse the land. But, these rights have limits. Three important limitations upon the holder of fee simple are:  Cannot commit torts (e.g., occupiers’ liability, nuisance, rule in Rylands v Fletcher )  Must comply with laws (e.g., Criminal Code , zoning, building codes, environmental laws, etc.)  Expropriation – the government can take all or part of the holder’s bundle of rights away. For instance, if the government wishes to build a hospital or highway on land that is owned by private parties the government will use its expropriation power. Very importantly, the government will compensate the person who is having their rights expropriated. Pause and Reflect Please see Ethical Perspective 15.1 (Expropriation) in the textbook. Understandably, Molly is upset. However, did Molly appreciate that her “bundle of rights” was always subject to the government’s power of expropriation? Most people do not. Most people will not have their rights expropriated but it must be understood it is always possible. Life Estate

A life estate gives a person exclusive possession of land for the duration of a particular person’s life. The particular person could be the life estate holder’s life or someone else’s life (e.g., Queen of England). Since it is unknown how long that particular person will live, the length of a life estate is uncertain. This is unappealing for most. However, a life estate may be useful within families, especially as part of an estate plan. For instance, a single parent may want a disabled child to have a life estate in the home for his/her lifetime, and upon the child’s death the land will pass onto another beneficiary. A life estate by its very nature will come to an end upon the death of the named person. Upon that death, the land must pass onto someone, so when creating a life estate, the creator must also address whether the land will revert to the creator of the life estate or whether the remainder will pass onto someone else. Two examples will illustrate this: Example #1 Robert owns Lot #1 in fee simple. He grants a life estate to Zara for her life. Robert holds the reversionary future estate . When Zara dies, Lot #1 will revert to Robert, and Robert will have fee simple in Lot #1. Example #2 Robert owns Lot #1 in fee simple. He grants a life estate to Zara for her life, and grants George a remainder future estate . Robert has no interest whatsoever in Lot #1. When Zara dies, Lot #1 will transfer to George in fee simple. The holder of a life estate has the right to:  Exclusive possession of the land for the duration of the particular life named ;  Profits earned from the land;  Sell or gift the life estate to someone (but the life estate would still be based upon the original life named);  Lease (but term of lease cannot exceed the “life”);  Generally, use and abuse the land (subject to laws and to no acts of “waste” described below). But, these rights have limits, such as:

 No act of “waste” . “Waste” occurs when land is changed in a way that significantly affects its value negatively. “Waste” occurs by way of an act. Demolishing the buildings on the land would very likely be an act of waste. However, omitting to do something (e.g., not repairing the buildings) does not constitute waste since no act is involved despite the fact that the omission may have a negative impact on the value of the land.  Cannot commit torts (e.g., occupiers’ liability, nuisance, rule in Rylands v Fletcher )  Must comply with laws (e.g., Criminal Code , zoning, building codes, environmental laws, etc.)  Expropriation . A life estate will come to an end when the named person dies, therefore the holder of a life estate cannot pass the life estate to his/her heirs because the life estate no longer exists. Leasehold Estate The holder of a leasehold estate (commonly known as a lease) acquires the exclusive possession of a property for a stipulated time period. We will discuss leases later in this module. Please see the Concept Summary 15.1 (Fee Simple, Life Estate, and Lease) in the textbook. Shared Ownership An estate in land may be owned by one person or by more than one person.

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Figure 9.1. Lot ownership. Source: Iannazzo, N. (2020) Lot #1 is individually owned by Jenny Jones, whereas Sally Smith and Robert Green have shared ownership of Lot #2. Sally and Robert have an undivided interest in the whole of Lot #2. Sally and Robert should expressly agree as to the type of shared ownership they want, because the choice will have significant implications. There are 2 types of shared ownership:  joint ownership (or joint tenancy);  co-ownership (or co-tenancy or tenancy-in-common). In Ontario section 13(1) of the Conveyancing and Law of Property Act states: Where by any letters patent, assurance or will, made and executed after the 1st day of July, 1834, land that has been or is granted, conveyed or devised to two or more people, other than executors or trustees, in fee simple or for any less estate, it shall be considered that such persons took or take as tenants in common and not as joint tenants, unless an intention sufficiently appears on the face of the letters patent, assurance or will, that they are to take as joint tenants . (bolding added for emphasis)

So, if the parties wish to create a joint tenancy it is imperative that they make this clear in the granting document, otherwise the Conveyancing and Law of Property Act will deem it to be a tenancy-in-common. Joint vs. Co-Ownership Joint Ownership (Joint Tenancy) Joint ownership occurs when 2 or more persons share the exact same undivided interest in a property. In the example above, Sally and Robert each have a 50% interest in all of Lot #2. If there were 5 shared owners, each owner would have a 20% interest. The most significant characteristic of joint ownership is the right of survivorship . When a joint tenant dies, his/her interest in the property automatically passes to the surviving joint tenant(s). Co-Ownership (Tenancy-in-Common) Co-ownership occurs when 2 or more persons share some undivided interest in a property. If Sally and Robert were buying a property as co-owners they could have a 50% interest in all of Lot #2, but on the other hand they could have different percentage interests, such as Sally has a 75% undivided interest and Robert has a 25% undivided interest. In a co-ownership there is no right of survivorship . When a co-owner dies, his/her interest in the property will pass to his/her heirs, not onto the surviving co- owner(s). Severance of Joint Ownership (Joint Tenancy) Parties may acquire a property as joint owners (joint tenancy) but later may wish to change it to a co-ownership because they no longer want the right of survivorship. The process of changing a joint ownership to a co-ownership is known as “severance”. A joint ownership may be severed in the following ways:

 the joint tenants agree to change their ownership to a co-ownership;  one joint tenant deals with the property in a way that is inconsistent with joint ownership;  a court ordered partition dividing either the property or its sale proceeds. John, Sally and George owns a property as joint tenants. John sells his interest in the property to Carly. Sally, George and Carly now own the property. Question: What type of joint ownership do they have? Answer: Sally and George are joint tenants with each other. Carly is a tenant-in-common with Sally and George. John has no interest in the property since he sold his entire interest to Carly. When John sold his interest to Carly he severed the joint tenancy he had with Sally and George. Question: What percentage interest does each party have? Answer: Sally and George are joint tenants and have a 2/3 undivided interest in the property. Sally and George each have an equal share of the 2/3. Carly has a 1/3 undivided interest in the property. Carly is a tenant-in-common with Sally and George. Question: Discuss what happens in the event that: a. Sally dies first; b. George dies first; c. Carly dies first. Click for answer Answer: a. If Sally dies, her interest in the property passes onto the surviving joint tenant, George, by right of survivorship. George would own a 2/3 undivided interest in the property. George would be a co-owner or tenant-in-common with Carly. b. Same analysis as in (a). If George dies, his interest in the property passes onto the surviving joint tenant, Sally, by right of survivorship. Sally would own a 2/3 undivided interest in the property. Sally would be a tenant-in-common (co-owner) with Carly. c. If Carly dies, her 1/3 undivided interest in the property would pass onto her heir. Carly’s heir would own 1/3 undivided interest. The heir would be a tenant-in-common (co- owner) with Sally and George.

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Please see the Concept Summary 15.2 (Shared Ownership) in the textbook. Condominiums The condominium is created by statute. Generally, condominiums consist of individual units (residential or commercial) and common areas (e.g., hallways, stairwells, front lobbies, elevators, recreational facilities). The units are individually owned. The common areas are owned by all the unit owners, as tenants-in-common. Since unit owners occupy their units in close proximity to other unit owners, and they share ownership and use of common areas, it is imperative to have rules governing behaviour, management and cost sharing. As a result, a condominium will have many rules, and a non-profit condominium corporation will be created and be responsible for managing the complex and enforcing the rules. Easements An easement is a right attached to one parcel of land over another person’s land that makes the first parcel more useful. Easements can be positive or negative in nature. Almost all easements are positive. For example, the owner of a parcel of land may have the right to drive a vehicle over another person’s land to get to and from a public road. An example of a negative easement could be a landowner being prohibited from constructing a building that obstructs sunlight to another parcel land. Negative easements are rare. Some important characteristics of an easement are: 1. There must be a dominant tenement and a servient tenement. The dominant tenement is the land that benefits from the easement. The servient tenement is the land that carries the burden of the easement. 2. The dominant tenement and the servient tenement may touch but it is not necessary as long as they are reasonably close to each other. 3. Properly created easements “ run with the land ”. The easement stays with the dominant and servient tenements despite the change in ownership of the land.

Figure 9.2. Easements. Source: Iannazzo, N. (2020) An easement may be created in the following ways: 1. Express Easement: The owner of Lot #2 expressly grants an easement in favour of Lot #1. 2. Necessary Implication: The court implies an easement when the dominant tenement and servient tenement were commonly owned and the owner transfers the dominant tenement that is landlocked or the owner retains the dominant tenement that is landlocked. In other words, there is no access to the dominant tenement from a public road. The court will presume that an easement is necessary over the servient tenement unless there is clear intent that the dominant tenement was intended to be landlocked. 3. Easement by Prescription: Some provinces permit the creation of an easement by prescription, which arises when someone uses another person’s land in a particular way, for a long time, without secrecy, without objection, and without permission. In Ontario the Real Property Limitation Act states that one must use another’s land for 20 continuous years. Importantly, an easement by prescription may only arise in land that is recorded in the Registry System, which will be discussed in a subsequent module. 4. Statutory: By statute, the government has granted certain utility and service companies the right to install and maintain cables and pipes on and through someone’s land. Although referred to as public easements or statutory easements there is no dominant tenement. A licence is permission to do something that would otherwise be prohibited. Parking your car in a parking garage is usually structured as a licence. Without a

licence to park there you would be a trespasser. A licence does not run with the land nor are there dominant and servient tenements. A licence is not an easement. Activity Jillian owns Lot #1 and Scott owns Lot #2. Lots 1 and 2 are next to each other. For 25 years, Jillian has been taking a daily daytime walk over Lot 2 to get to the lake. She had no permission from Scott. For the very first time, Scott is telling Jillian to stop trespassing on his land. Jillian believes she has the right to continue crossing over Lot 2. Question: Who is correct? Jillian or Scott. Is there anything else you would want to know? Answer: Jillian may argue an easement by prescription . She has been crossing part of Lot #2 continuously for a minimum 20 years, without secrecy, without objection, and without permission ( Real Property Limitation Act (Ontario)). She has been doing it, in fact, for 25 years, in the open, without Scott objecting or consenting. One important fact we do not know is whether Lot #2 is in the Registry System or Land Titles System. If during the 25 years, Lot 2 was in the Registry System, Jillian will have an argument to an easement by prescription. However, if it was in the Land Titles System, Jillian will not succeed because easements by prescriptions have been abolished in the Land Titles System. Even if Lot #2 is in the Registry System, whether Jillian succeeds will depending on whether she can prove all the elements of an easement by prescription. Jones owned Lots 5 and 6. Jones sold Lot 5 to Smith. Smith started crossing over Lot 6 in order to get to and from Queen Street. Jones told Smith to stop crossing his property.

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Figure 9.3. Street access. Source: Iannazzo, N. (2020) Question: Does Smith have any legal right to cross over Lot 6? Yes or No. Explain and support your answer. Answer: Smith can argue for an easement by necessary implication . Lots 5 and 6 were commonly owned by Jones, and then he sold Lot 5 to Smith, resulting in Lot 5 being landlocked (i.e., no access from a public road). A court will likely presume that an easement is necessary over Lot 6 for the purpose of access and egress to Queen Street. There is no indication that Smith expressly agreed to buy Lot 5 as landlocked. Restrictive Covenants A restrictive covenant is a promise to use a parcel of land in a way that benefits one property and burdens another. Some important characteristics of a restrictive covenant are: 1. There must be a dominant tenement and a servient tenement. The dominant tenement is the land that benefits from the restrictive covenant. The servient tenement is the land that carries the burden of the restrictive covenant.

2. The dominant tenement holder cannot use the servient tenement. 3. The restrictive covenant prohibits the holder of the servient tenement from using their land in a particular way . 4. The prohibitions must be negative in nature (e.g., the servient tenement shall not be used for industrial purposes). 5. Properly created restrictive covenants “ run with the land ”. The restrictive covenant stays with the dominant and servient tenements despite the change in ownership of the land. 6. Restrictive covenants are created by agreement or by building scheme. They are not created by the government. Land developers use building schemes to prohibit certain activities or items so as to enhance the community. For example, in a residential subdivision, a restrictive covenant may prohibit any commercial use (regardless of the zoning by-law) and prohibit the installation of any tower antennae and satellite dishes (regardless of the zoning by-law). Pause and Reflect Please read very carefully the material in the textbook related to Figure 15.1 (Enforcement of Restrictive Covenants) . Do you understand which covenants “run with the land”? Do you understand why certain covenants bind subsequent owners and why others do not? Do you understand who can enforce the covenants? Mineral Leases Although a person may own an estate in land, the government usually owns the minerals (i.e., substances in the ground such as iron, oil, gas, etc.). The government can enter into a mineral lease with a party, such as a mining company, to allow it to enter someone’s land and extract minerals from the ground. Profit à Prendre A profit à prendre is a right to take something valuable away from another person’s land. For example, a person may have a profit à prendre allowing him/her to enter another’s land to cut trees and remove them. The holder of the profit à prendre becomes the owner of the trees only when the trees are cut and removed from the land.

Please review the Concept Summary 15.4 (Non-Possessory Interests in Land) in the textbook. Lease Overview A leasehold estate, commonly known as a lease, is a property interest created by contract. The contract is between the landlord and the tenant. The landlord is the person with an estate in land who agrees to allow another person, the tenant, to use and possess the property for a specified time period. A lease must satisfy the rules of a valid contract (e.g., intent, offer, acceptance, consideration, capacity, lawful purpose). In Ontario, the Statute of Frauds requires that all leases for a time period greater than 3 years must be in writing to be enforceable by a court. It is possible to create an enforceable oral lease for 3 years or less, provided you can prove its existence. Prudence dictates that all leases, regardless of length, be in writing. Leasing is an important legal vehicle used to provide residential housing and space to businesses. With respect to residential leases most provinces have specific legislation modifying general leasing law in an effort to protect residential tenants. We will very briefly touch upon residential leases later in this section. Duration All leases must have a clear beginning and end. There are several types of lease in relation to duration: 1. Fixed Term Tenancy: This is a tenancy that has a clear beginning and end. For example, the tenancy begins on January 1, 2021 and ends on December 31, 2026. At the end of the term the parties can agree to enter into a new term, or if they do not, they can create a periodic tenancy by the tenant remaining in the premises and paying rent that the landlord accepts. 2. Periodic Tenancy: This tenancy is for a fixed period and is automatically renewed at the end of each term unless one of the parties gives the other party the required notice of termination. 3. Tenancy at Will: This tenancy has no set term and either party can terminate the lease at any time.

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4. Tenancy at Sufferance: This tenancy occurs when a tenant continues to possess the premises at the end of the lease without the landlord’s permission. Since there is no agreement to remain in the premises, arguably this is not a tenancy, and trespass to land is occurring. Assignments and Subleases Sometimes during the term of the lease the tenant decides it wants to leave. This may be due to the tenant not being able to afford the rent or maybe the tenant wishes to move into different premises. The tenant may attempt to negotiate with the landlord for a release from the lease; however, if this is not possible, the tenant will have to consider an assignment or a sublease. Assignment An assignment occurs when a contractual party transfers their rights to a third party. The tenant would be known as the “assignor” and the third party, the “assignee”. A few important points about assignments:  Landlord’s Consent : Almost all landlord’s forms of leases prohibit the tenant from assigning (and subleasing) without the landlord’s prior written consent. If such a lease clause exists the tenant must obtain the landlord’s prior written consent otherwise it will be in breach of the lease.  Entire Term : An assignment must transfer the entire term (and all the space). Transferring less than the entire term, even by one day, is a sublease.  Real Covenants : An assignment does not transfer all obligations in a lease to an assignee. An assignee would be bound by real covenants, which run with the land. Real covenants are promises that are directly related to the land. Defining real covenants is very difficult. Real covenants do not include personal promises. Courts have held that real covenants include the tenant’s obligation to pay rent and to repair the premises, but not the original tenant’s promise to buy the landlord’s products. So, by virtue of an assignment, the assignee must pay rent to the landlord and repair the premises, but is not obligated to honour any personal promises. This situation has led landlords to try to obtain separate contracts from assignees to bind them to personal covenants.  Liability : An assignment will not release the original tenant from obligations under the lease. If the assignee does not pay rent, the assignor (original tenant) would be liable. The original tenant continues to be bound to the lease by privity of contract, unless the landlord releases the original tenant, which is unlikely.

Sublease A sublease occurs when a tenant (sub-landlord) grants a lease to a third party (sub- tenant) for part of the original term or part of the premises. If the tenant’s original lease (head lease) prohibits subleasing without the landlord’s (head landlord’s) prior written consent, then the landlord’s (head landlord’s) consent will be required otherwise the tenant will be in breach Activity Rex Manufacturing Ltd. (“Rex”) entered into a 10-year lease for industrial space. After 6 years, Rex wanted to move to different premises. The lease stated that the Landlord must give prior written consent to a transfer of the lease. Rex requested the Landlord’s consent to transfer the remaining lease to Taz Ltd. (“Taz”), and the Landlord gave its written consent. Taz moved into the space and started paying rent to the Landlord. After 2 years, Taz stopped paying rent and went out of business. The landlord is now demanding that Rex honour the lease, including paying the rent. Rex is refusing because the Landlord had approved Taz. Question: Who is correct? Answer: The Landlord is correct . From the facts, it appears that Rex assigned the lease to Taz, with the Landlord’s consent. An assignment will not release the original tenant from obligations under the lease. The original tenant continues to be bound to the lease by privity of contract, unless the landlord releases the original tenant. Rex received the Landlord’s consent to the assignment but did not get a release from the Landlord, therefore Rex is still bound to the lease. Commercial Leases It is common for businesses to lease space (e.g., office, retail, industrial) rather than buying the building. The type of leases that are used to document the tenancy vary in length and complexity. Some common lease clauses will be discussed below.

Rent  Tenant’s Obligation to Pay Rent: The rent is usually expressly agreed upon. However, in the rare event it isn’t the court is likely to imply a reasonable amount.  Calculation of Rent: Commercial leases may set out the rent as a flat amount ($2,000 per month) or as a formula, $20 per square foot per year. A gross lease obligates the tenant to pay a single amount of rent. This amount will cover the use of the space and all expenses associated with it. If the landlord’s cost of operating the building increases the landlord is responsible. On the other hand, a net lease obligates the tenant to pay rent for the space and a separate amount for stipulated operating costs (e.g., property taxes, utilities, insurance, snow removal, etc.). Landlords prefer the net lease because any operating cost increases get paid by the tenant.  Rent Review: The parties can negotiate a fixed rent ($20 per square foot per year) for the term. On the other hand, they can agree on an escalating rent (1st year $20 per square foot per year; 2nd year $21; 3rd year $22). In longer-term leases the parties may agree that the rent will be reviewed after a period of time and the rent adjusted. For example, in a 10-year lease, the rent for the initial 5 years could be set at $20 per square foot per year, and then the rent for the subsequent 5 years will be based upon a formula (increase rent by Consumer Price Index) or based upon market rents to be agreed upon failing which it will be determined by arbitration.  Independent Obligation: The obligation to pay rent is independent of other obligations in the lease. In the event the landlord is in breach of a lease clause, the tenant must still pay rent. The tenant’s recourse would be to sue the landlord for breach of the lease. Repair and Maintenance  Generally, at common law, a landlord’s repair and maintenance obligations are very low. The tenant’s common law obligation is to treat the premises in a “tenant-like manner”. However, landlords, through their leases, attempt to shift more responsibility and cost of repairs and maintenances onto the tenant. A prudent tenant would resist this, and instead try to get the landlord to contractually agree to be responsible for certain repairs, maintenance and replacements.  A landlord’s form of lease will usually prohibit any alterations to the premises without the landlord’s prior written consent. Quiet Possession  A covenant of quiet possession prohibits the landlord from interfering with the tenant’s enjoyment of the premises.

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 A landlord can breach this covenant in numerous ways. If the premises are still occupied by a previous tenant, the new tenant cannot possibly enjoy possession of the premises. Another breach could arise if the landlord enters the tenant’s premises daily without any reasonable justification.  Remedies for breach of quiet possession will vary depending upon the circumstances, but could include an injunction, reduction in rent, discharge of lease, and compensatory damages. Remedies  Usual contractual remedies: damages, discharge, injunction  Eviction: The landlord may seek to re-take possession of the premises due to the tenant’s breach of the lease. Upon eviction (re-entry) the tenant’s rights in the premises are forfeited. A tenant may ask a court to grant it relief from forfeiture.  Distress: Provided that the landlord has not evicted the tenant, the landlord may exercise its remedy of distress. This remedy allows a landlord to seize the tenant’s property, sell them, and use the proceeds to pay rent arrears. You may recall that a plaintiff should “mitigate” its losses, otherwise a court may reduce the amount of damages that the defendant must pay. Interestingly, in Highway Properties Ltd. v Kelly Douglas & Co. the Supreme Court of Canada stated that “mitigation” does not apply to a landlord when a tenant breaches the lease. For example, if a tenant wrongfully vacates the premises, the landlord may leave the space empty for the balance of the term, and sue the tenant for damages for the entire vacancy period, despite not make any reasonable efforts to re-lease the space. Practically speaking, a prudent landlord would not do this, it would try to re-lease the space rather than rely upon a successful judgment that may never be paid. Please see the textbook for Risk Management: Lease or Purchase . Please see Concept Summary 15.5 (Risk Management: Lease or Purchase) in the textbook. Activity Please read You Be the Judge 15.1 (Commercial Leases and Mitigation) in your textbook. The tenant, Bainsbury, admitted breaching the lease, but does not believe it should be liable for all the rent for the remainder of the term (13 years left). Question: Do you agree with Bainsbury’s argument ? Explain your answer.

Answer: The Supreme Court of Canada decision in Highway Properties Ltd. v Kelly Douglas & Co. held that “mitigation” does not apply to a landlord when a tenant breaches the lease. Therefore, Bainsbury would be liable for the remaining 13 years of rent. Since there appears to be a replacement tenant available, albeit at a lower rent, reasonableness would suggest that the landlord lease the empty space to the replacement tenant. If the landlord decided to lease the empty space to a new tenant at 25% less rent the landlord could sue Bainsbury for that difference. Despite this being a reasonable option, based upon Highway Properties the landlord could leave the space empty and sue Bainsbury for 13 years of unpaid rent. Time Capsule In the year 2020, Ontario faced the Covid-19 pandemic. The pandemic had a significant negative impact on commercial tenants. The Ontario government used its statutory powers to intervene in the marketplace to impose a number of changes to protect commercial tenants. The Ontario government passed the Protecting Small Business Act , temporarily halting or reversing evictions of commercial tenants and protecting them from being locked out or having their assets seized. This legislation applied to businesses that were eligible for federal & provincial Canada Emergency Commercial Rent Assistance from May 1, 2020 until August 31, 2020. As of the date of this writing, the pandemic continues, so the government may extend existing protections and/or implement more. Residential Leases In Ontario, the Residential Tenancies Act regulates residential leases and significantly alters the duties and responsibilities of the parties. An in-depth review of the law in this area is beyond the scope of the material. However, a few points will be made:  The landlord’s remedy of distress has been abolished.  A landlord must make reasonable efforts to mitigate losses from a tenant’s breach.

 For most rental units in Ontario rent controls are in place limiting how much rent can be increased.  A landlord has significant statutory repair and maintenance obligations.  Landlord’s right to terminate a lease is limited to statutory grounds. Termination notices are also regulated, and evictions typically take longer due to the procedure that must be followed. In the year 2020, Ontario faced the Covid-19 pandemic. The pandemic had a significant impact on residential tenants. Many were not able to work or had reduced work hours. The Ontario government used its statutory powers to intervene in the marketplace to impose a number of changes to protect residential tenants. For example, there was a moratorium on all residential evictions from March 19, 2020 to July 31, 2020. Also, landlords were prohibited from any increase in rent in 2021. Indigenous Interests in Land The rights of Indigenous Peoples are an important aspect of Canadian law and those rights include Indigenous interests in land. The textbook notes there is a history of the Crown treating Indigenous People’s unjustly and points to the findings of the Truth and Reconciliation Report as an example. Although the rights of Indigenous Peoples are wide-ranging, this section of the module focuses on the various different types of Indigenous interests in land. In addition, this section also addresses the implications these interests have on Canadian business transactions. It should be noted at the outset that, in addition to the Indigenous interests in land discussed here, Indigenous Peoples can also acquire the legal interests in land studied already in this module (such as fee simple). Indigenous Legal Traditions and Customary Interests in Land Indigenous Peoples have their own traditional laws and customs including those relating to land. These traditional customs are referred to by the textbook as customary interests in land and are local to the Indigenous communities that recognize them. Quickly review / skim the section after “Indigenous Legal Traditions and Customary Interests in Land”. You will note that there are three other types of Indigenous legal interests in land discussed

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(Aboriginal title, Aboriginal rights, and treaty rights). In what significant way do those three Indigenous interests in land differ from Aboriginal title, Aboriginal rights, and treaty rights? Customary interests in land are generated by an Indigenous community and these interest may or may not be recognized by a Canadian court. In contrast, Aboriginal title, Aboriginal rights, and treaty rights all involve Canadian courts and/or the Crown in their creation. Aboriginal Title, Aboriginal Rights, and Treaty Rights This subsection addresses three types of Indigenous interests in land. The first two are common law rights. These rights are (1) Aboriginal Title and (2) Aboriginal Rights . In order to assist us in understanding the nature of these rights, the textbook analogizes Aboriginal title to fee simple. This analogy is useful in communicating the general nature of this Indigenous interest in land. However, there are also some significant differences. Review and answer question #18 (page 392 of textbook re: similarities and differences between Aboriginal Title and Fee Simple). The textbook also makes an analogy between an Aboriginal right and a profit à prendre . Comment on whether this analogy is accurate. These are both similar because they involve an entitlement to take something from the land (as is the case with fishing or hunting for example) but do not include the right to exclusive possession. However, an Aboriginal right must be held collectively by an Indigenous Nation (not by individuals). Similarities Differences Exclusive possession of land for indefinite duration Aboriginal title  Collective Right: which must be held by an Indigenous Nation (not by individuals)  Land use restriction: must ensure future generations can also benefit from land  Transfer restriction: Aboriginal title can only be transferred to the Crown (i.e. can’t sell or give it way to any other person or entity)

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It is also worth noting that both Aboriginal title and Aboriginal rights are based upon the fact that Indigenous Peoples were here before European settlers. How is this reflected in how an Indigenous Nation must establish Aboriginal title or Aboriginal rights? Establishment of those Indigenous interests in land involves demonstrating some claim to the interest in land before or at the time European settlers first arrived. This means establishing that, at the time European settlers first arrived the Indigenous Nation had exclusive possession of the land (in the case of Aboriginal Title) or that there was an integral cultural practice of an Indigenous community, such as hunting or fishing on the land (in the case of an Aboriginal right). The third Indigenous interest in land are treaty rights . These rights arise from agreements between Indigenous Peoples and the Crown as evidenced in a written document known as a treaty. These treaty rights can include legal interests in land. For Canadian businesses, the potential existence of the Indigenous interests in land means that extra caution must be taken when engaging in activities that could impact those interests. If an Indigenous Nation holds an Indigenous interest in land, one method of mitigating the risk of infringing those interests would be to obtain the consent of the Indigenous Nation. This can be done through an impact benefit agreement . As the name suggests, in exchange for allowing their interest in the land to be impacted by an activity, the Indigenous Nation is given some of the benefit of that activity. Since impact benefit agreements mitigate the risk of litigation, they are consistent with the textbook’s overall theme of applying legal knowledge in a risk management setting. Fred owns a business and would like to use a portion of land that appears to be owned by the Crown (based on a search of the government land registry). He has also has searched through all relevant treaties but cannot find any mention of that portion of the land in them. However, an Indigenous Nation has told Fred that they have Aboriginal title to the land. Based upon the textbook discussion thus far, what legal issues should Fred consider? Although the land appears to be owned by the Crown, it could be subject to an Indigenous land interest. Treaty rights are not the only possible Indigenous land interest (although they arguably easier to ascertain because one need only read all the relevant written treaties – assuming the treaty is written clearly and that its validity is uncontested). Fred needs to consider whether or not the First Nation is claiming Aboriginal title to the land or an Aboriginal Right to the land. If the First Nation does indeed have Aboriginal title or an Aboriginal right, Fred should consider approaching the First Nation’s leaders to negotiate an impact benefit agreement.

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Reserve Lands Reserve lands are defined by the textbook as lands that have been set aside or “reserved” for a First Nation. Although the textbook places the topic of “Reserve Lands” under a separate heading, the topic actually overlaps with the subject of treaty rights because some (but not all) reserves were created by treaties with Indigenous Nations. The Indian Act is an important piece of federal legislation that provided for federal control of First Nations Peoples. As noted in the textbook, it was a “significant tool of assimilation and subjugation of First Nations Peoples” that has been amended numerous times but remains controversial. With respect to reserve land, please review the following concepts in the textbook before proceeding to the next activity  Collective governance: (i.e. how the land reserve is collectively owned and governed)  Restrictions on transfer  Surrender  Designation – a conditional surrender  Certificate of possession: Consider the first three aspects above (collective governance, restrictions on transfer and designation). According the textbook, what are the advantages and disadvantages that result from these aspects? Pros: These aspects provide a safety measure to ensure that the First Nation maintains its legal interest in the reserve lands. Any transfer (i.e. a surrender) or designation (i.e. leasing) would have to first meet the approval of the band council and chief. Cons: These aspects also add a layer of administrative costs for both the First Nation and any third-party wishing to acquire a leasehold interest in the reserve lands. For example, the process of first obtaining the First Nations’ approval of the designation and then having the Crown enter into the lease on behalf of the First Nations will be more time-consuming and entail higher transaction costs (as compared to if the First Nation could have directly entered into the transaction with the third-party). ABC Corporation would like to use a parcel of land in a Canadian province as part of its business operations. ABC can’t afford to buy this land but would like to rent it. The land is actually part of a land reserve in favor of a First Nation. ABC has heard that the First Nation band leader is interested in leasing the reserve land to ABC. Is it possible for the First Nation band leader to lease the land directly to ABC? If not, what would the likely procedure be? The First Nation band leader cannot directly lease the reserve land to ABC. The most likely procedure to follow would be to attempt a designation. In order for this to occur, the First Nation

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would need a community vote to approve of the conditional surrender (i.e. a designation) of the reserve land to the Crown. The Crown would then enter into the lease, on behalf of the First Nation. The First Nation would enjoy all the benefits of the lease and the Crown would owe a fiduciary duty to the First Nation with respect to this transaction. Assume a member of a First Nation band was assigned a portion of reserve land (through a certificate of possession). Mr. Smith (who is not a First Nation member) would like to build a store on that portion of reserve land and has offered to purchase the certificate of possession from the First Nation member. Comment on Mr. Smith’s proposed sale transaction. Mr. Smith’s proposed transaction would not be permitted. A certificate of possession can only be held members of the First Nation – it cannot be held by any person who is not a member of the First Nation. Land Codes, Self-Government Agreements and Modern Treaties As noted above, the Indian Act has been controversial and subject to criticism. One of the criticisms is that the Indian Act adds a layer of administration (i.e. consent of the federal government) to land transactions involving First Nations land. As a result, there have been efforts to allow First Nations to deal with their land without going through the procedures imposed by the Indian Act. These efforts involve allowing the First Nation to develop its own system of administering land tenure. There are two methods described in the textbook – both of which are based on legislation: (1) First Nations Land Management Act and (2) S elf - Government Agreements and Modern Treaties . Reserve Lands Reserve lands are defined by the textbook as lands that have been set aside or “reserved” for a First Nation. Although the textbook places the topic of “Reserve Lands” under a separate heading, the topic actually overlaps with the subject of treaty rights because some (but not all) reserves were created by treaties with Indigenous Nations. The Indian Act is an important piece of federal legislation that provided for federal control of First Nations Peoples. As noted in the textbook, it was a “significant tool of assimilation and subjugation of First Nations Peoples” that has been amended numerous times but remains controversial. With respect to reserve land, please

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review the following concepts in the textbook before proceeding to the next activity  Collective governance (i.e. how the land reserve is collectively owned and governed)  Restrictions on transfer  Surrender  Designation – a conditional surrender  Certificate of possession Consider the first three aspects above (collective governance, restrictions on transfer and designation). According the textbook, what are the advantages and disadvantages that result from these aspects? Pros: These aspects provide a safety measure to ensure that the First Nation maintains its legal interest in the reserve lands. Any transfer (i.e. a surrender) or designation (i.e. leasing) would have to first meet the approval of the band council and chief. Cons: These aspects also add a layer of administrative costs for both the First Nation and any third-party wishing to acquire a leasehold interest in the reserve lands. For example, the process of first obtaining the First Nations’ approval of the designation and then having the Crown enter into the lease on behalf of the First Nations will be more time-consuming and entail higher transaction costs (as compared to if the First Nation could have directly entered into the transaction with the third-party). Activity ABC Corporation would like to use a parcel of land in a Canadian province as part of its business operations. ABC can’t afford to buy this land but would like to rent it (i.e. would like the owner of the land to lease the land to ABC). After some research, ABC discovered that the land is actually part of a land reserve in favor of a First Nation. ABC has also heard that the First Nation band leader is interested in leasing the reserve land to ABC. Is it possible for the First Nation band leader to lease the land directly to ABC? If not, what would the likely procedure be?

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The First Nation band leader cannot directly lease the reserve land to ABC. The most likely procedure to follow would be to attempt a designation. In order for this to occur, the First Nation would need a community vote to approve of the conditional surrender (i.e. a designation) of the reserve land to the Crown. The Crown would then enter into the lease, on behalf of the First Nation. The First Nation would enjoy all the benefits of the lease and the Crown would owe a fiduciary duty to the First Nation with respect to this transaction. Assume a member of a First Nation band was assigned a portion of reserve land (through a certificate of possession). Mr. Smith (who is not a First Nation member) would like to build a store on that portion of reserve land and has offered to purchase the certificate of possession from the First Nation member. Comment on Mr. Smith’s proposed sale transaction. Mr. Smith’s proposed transaction would not be permitted. A certificate of possession can only be held members of the First Nation – it cannot be held by any person who is not a member of the First Nation. Land Codes, Self-Government Agreements and Modern Treaties As noted above, the Indian Act has been controversial and subject to criticism. One of the criticisms is that the Indian Act adds a layer of administration (i.e. consent of the federal government) to land transactions involving First Nations land. As a result, there have been efforts to allow First Nations to deal with their land without going through the procedures imposed by the Indian Act. These efforts involve allowing the First Nation to develop its own system of administering land tenure. There are two methods described in the textbook – both of which are based on legislation: (1) First Nations Land Management Act and (2) Self-Government Agreements and Modern Treaties . XYZ Corporation would like to build and operate a factory on reserve land. XYZ Corporation is willing to either purchase the land or rent it (under the terms of a lease with the First Nation). Assuming the First Nation would like to also enter into the transaction with XYZ, briefly outline some of the considerations and possibilities that need to be addressed in this situation based on the textbook. The first step would be to research what legal rules govern the sale or lease of the reserve land. There are several possibilities here:

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1. Self-Government Agreements and Modern Treaties : if the land code governing the First Nations land is under a self-government agreement or modern treaty, then one must carefully review that land code to determine if the sale or lease is allowed. If they are allowed, one must then carefully follow the necessary procedures. 2. First Nations Land Management Act : if the land code is one that was developed by the First Nation under the First Nations Land Management Act, then one must carefully review that code to ascertain what is permissible and the procedures which must be followed. Note that since fee simple transfers are not permitted under this legislation, it is unlikely that a sale would be possible here. 3. Indian Act : If the Indian Act applies, then a sale is out of the question because under that legal regime, the land cannot be transferred (only surrendered to the Crown). A lease is possible through the designation process. In that case, the regular procedures would have to be followed (i.e. band council consent, Crown signing lease on behalf of First Nation). Summary We have reviewed estates (possessory) and interests (non-possessory) in real property. These rights can be enforced against anyone. Ownership of estates can be shared between two or more persons and can be held as “co-owners” or “joint owners”. We briefly reviewed condominiums. And, we reviewed leases, and the basic differences between residential and commercial leases.

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Module 9 - Real Property Interests & Leases

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