Who’s Responsible for This?

Clients from other jurisdictions are often surprised that notwithstanding the fact that Alberta mortgages, like the mortgages from their jurisdiction, contain provisions giving the lender the power to sell the mortgaged property, these sales are actually conducted by the Court.  This has been the case since the 1930s and is so firmly established in the Alberta legal firmament, it is difficult to imagine it changing. It provides protection for debtors by having the sale process controlled by the Courts and is part of a larger web of mortgagor protection legislation from that time period.  While often seen by lenders as creating delay and expense, it also provides some protection for the lender in that it is the Court, not the lender, who makes the final decision with respect to a sale.

In a recent appearance in chambers, one of our associates had the case of Chief Construction Company Ltd. v. Royal Bank of Canada[1] cited to him by the Court.  We were not aware of it and thought it raised some interesting issues for lenders regarding some of the limitations to these protections.

Chief Construction Company Ltd. (“Chief Construction”) purchased 2 houses on 32 acres of lands in a judicial sale in a foreclosure filed by Royal Bank of Canada (“RBC”).  Between the date that Chief Construction’s offer was accepted by the Court and the closing, there was a flood on the property, causing $200,000 in damage to the houses on the property.  Chief Construction sued RBC for the $200,000 damages suffered.  Chief Construction applied for summary judgment against RBC.  RBC cross applied for summary dismissal.

In this instance, the Redemption Order had been granted September 30, 2011. It appears to have been in the usual form, which attached a judicial listing agreement and a schedule (“Schedule “A”) which was to be attached to any offer submitted to the Court for acceptance.  Among the notable terms of the Order were:

  • Realtor was given authority to list the property as an officer of the Court;
  • Any offers received would be subject to
    • Court approval; and
    • the terms and conditions set out in Schedule “A”;
  • Schedule “A” stated, among other things:
    • the seller of the property was the Court of Queen’s Bench of Alberta;
    • the property was sold “as is-where is”;
    • neither the seller or its agent had made any representations and warranties with respect to the property, including with respect to the condition of any buildings or improvements on the property;
    • if there was an inconsistency between the purchase agreement and Schedule “A”, Schedule “A” prevailed; and
    • the offer may only be accepted by an Order of the Court.

On March 15, 2012, a Preservation Order was granted, permitting RBC to enter the property, take over the utilities and do whatever was necessary to preserve the property.  This is a standard Order, usually granted when properties are abandoned.

Chief Construction hired their own realtor and viewed the property with that realtor.  They read and understood Schedule “A” and were aware this was a foreclosure sale.  Their representative never spoke to RBC or the realtor appointed by the Court.

An offer to purchase the property (the “Offer”) was made by Chief Construction on May 22, 2012. Section 6 of the Offer made a variety of representations and warranties by both the buyer and seller, including representations regarding the condition of the property.  There was also a provision that the property would be in substantially the same condition on possession as it was when the Contract was accepted.  Additionally, there was to be a Real Property Report (“RPR”) provided by the Seller.  Schedule “A” was attached to the Offer.  The version attached did not exclude the RPR requirement. The Offer was never signed by RBC but was accepted by the Court on June 1, 2012.  The closing date of the sale was June 29, 2012.

In April 2012, the property flooded and the buildings on the property were damaged.  RBC remediated the property and added those expenses to the amount owing under the mortgage.  Chief Construction was aware of the flood and the flood damage.

On June 20, 2012, a representative of Chief Construction and its realtor inspected the property.  The property was undamaged at that time.  The property was not inspected again by either party until July 3, 2012.  At that time, Chief Construction discovered that the buildings had been damaged by flooding.  It was alleged that the flood was due to the sump pump not working because RBC had not maintained the electricity to the property.  It was not possible to determine whether the damage occurred before or after the closing date.  RBC first became aware of the damage on July 17, 2012.

Chief Construction sued RBC in breach of contract and in negligence.  The suit was commenced nearly two years after the purchase closed.

The Master held that Chief Construction did not have a claim in contract against RBC.  However, he did not dismiss that claim against RBC.  Master Prowse held that Chief Construction had rights which arose from the Offer.  The Court had the ability to uphold the rights provided to Chief Construction under the Offer by ordering RBC to pay some of the proceeds it received as part of the foreclosure process to Chief Construction.  He did this with respect to the value of the RPR.

With respect to the rest of the claims in breach of contract and tort, he gave Chief Construction leave to amend their Statement of Claim to seek compensation for the rights under the contract that were violated by redistribution of the mortgage proceeds from RBC to Chief Construction.  This, the Master indicated, was the proper cause of action and remedy rather than a claim in contract or negligence.

The Court also ruled that the evidence with respect to the violation of those rights was not clear based upon the evidence before the Court.  There was also insufficient evidence to establish that RBC was negligent with regard to the failure of the sump pump.  As such, the rest of the claims had to proceed to trial.

The Court noted that the proper way to have dealt with these claims would have been an immediate application for advice and direction with respect to these losses.  However, the Court did not deny Chief Construction their relief on that basis or on the basis of the delay in filing their claim.

This is a surprising case in many ways.  It would appear that the Court interpreted Schedule “A” very narrowly.  This sort of narrow construction usually is reserved for standard form contracts, which are contracts where the terms are imposed by one party on the other.  Arguably, Schedule “A” is just that sort of document.

However, this sort of restrictive interpretation of a document generally is argued in the context of a claim of either breach of contract or negligence against one of the parties.  This is because documents like Schedule “A” usually are designed to protect the person who created them, which, in this case, is the Court.  In the case of breach of contract, the idea is that the party who is being sued has violated the rights of the person suing.  If the breach of contract is made out, the party being sued compensates the person suing for their loss.

What makes this situation unique is that the party who is being made to compensate the person suing is not a party to the contract.  In essence, what appears to be happening, but is not made explicit, is that the Court is finding itself in breach of contract.

The relief against RBC is equally unique.  The funds have already been paid in accordance with a prior Order of the Court.  It is likely that Order did not indicate that Chief Construction would receive any portion of the sale proceeds.  That Order has been filed and carried out.  Normally, one would have to set aside the earlier Order or appeal it and have it overturned in order to change the payment provisions.  Neither of these things have happened.

On a practical basis, this highlights for lenders and their counsel the importance of providing a form of real estate purchase contract and having the realtor request that all purchasers use that form.  If an offer is provided on another format, amendments should be requested to the offer to remove all representations and warranties along with any covenants stating the property will be in the same condition on closing as on the acceptance of the contract.  In most cases, purchasers are willing to do so because they are generally offering less than they would otherwise pay for the property due to the fact that it is being sold through a foreclosure.

[1] 2017 ABQB 589 (Alta. Q.B.)