Opinions and Legal Insights

Owners, Strata Plan LMS 3905 v Crystal Square Parking Corp: Parking Within the Lines of Contract Law

On October 23, 2020, the Supreme Court of Canada (“SCC”) released its decision on Owners, Strata Plan LMS 3905 v Crystal Square Parking Corp, 2020 SCC 29 [Strata], a case that reinforced the relationship between the traditional approach to contract law and pre- and post-incorporation contracts.

Facts

Crystal Development is a multi-use development in Burnaby, British Columbia. Crystal Development comprises of seven Air Space Parcels (“ASP”), which includes facilities such as parking, a cultural centre, and an office tower (Strata, para 5). ASPs section off development as they are built upwards. An ASP Agreement contracts the owners of the ASPs and the other parts of the property to set out rights and obligations such as rights of access, use of property, and share of costs.

The appellant, Owners, Strata Plan LMS 3905 (“Strata Co.”), is a strata corporation under the Strata Property Act, SBC 1998, c 43 [SPA]. The strata property takes up the office ASP within Crystal Development. Strata Co. further divided the ASP into 68 strata lots, which can be individually owned (Strata, para 8). Owners are referred to as the “members” or “owners” of Strata Co. The respondent, Crystal Square Parking Corp (“Crystal Parking”), owns and operates the parking ASP of Crystal Development (Strata, para 2).

Before Strata Co.’s incorporation, the developer of Crystal Development (the “Developer”) entered into an ASP Agreement with the City of Burnaby. Section 7.5 of the ASP Agreement obliged the parking facility to provide parking and vehicular access rights to other ASP owners in exchange for an annual fee (Strata, para 6). The ASP Agreement also contemplated that future strata corporations would enter into an assumption agreement with the owners of other ASPs to assume the obligations under the ASP Agreement. However, once Strata Co. was established on May 26, 1999, it never entered into such an assumption agreement with other ASP owners (Strata, para 8).

On June 28, 2002, the Developer sold the parking ASP to Crystal Parking. The Developer assigned the ASP Agreement and “all other existing agreements” to Crystal Parking, but “all other existing agreements” were never defined. Until 2012, Strata Co.’s members parked and paid fees contemplated by the ASP Agreement (Strata, paras 9-10).

In 2012, Strata Co. ceased paying the parking fees to Crystal Parking due to a dispute, and Crystal Parking revoked parking privileges as a result. Strata Co. sought that s. 7.5 of the ASP Agreement was null and void or that it was unenforceable. Crystal Parking counterclaimed for the unpaid fees that Strata Co. owed under the ASP Agreement (Strata, para 11).

Courts Below

Supreme Court of British Columbia

Justice Young, writing for the Supreme Court of British Columbia (“SCBC”), held that Strata Co. was not bound by the ASP Agreement. Young J. did not view Strata Co.’s conduct between 2002 and 2012 as an intention to enter into a post-incorporation agreement on the same terms as the ASP Agreement. Instead, she found that Strata Co. had a mistaken belief that they were bound by the agreement. A mistaken belief that a pre-incorporation contract was binding was insufficient to find that a post-incorporation contract existed (Strata, para 12).

British Columbia Court of Appeal

At the British Columbia Court of Appeal (“BCCA”), Willcock J.A. reversed the SCBC’s decision. The Court ruled that the trial judge erred in relying on the fact that Strata Co. did not have privity of contract in the pre-incorporation contract and that it had not ratified the contract — such conduct was irrelevant to determine whether Strata Co. had entered into a post-incorporation contract by its conduct. As a result, the BCCA ordered that Strata Co.’s and Crystal Parking’s claims be remitted to the trial court to determine all the contractual issues that the trial court did not address (Strata, para 13). 

Issues the Supreme Court of Canada

At the SCC, Strata Co. raised the following issues (Strata, para 14): 

  • Does the enforcement of a post-incorporation contract, which affects interests in land, amount to an exception to the general rule that positive covenants do not bind subsequent purchasers of land?
  • What is the correct analytical approach to take in order to find that parties have entered into a post-incorporation contract on the same terms as those of a pre-incorporation contract?
  • Can a strata corporation enter into a post-incorporation contract by its conduct?
  • Did the parties objectively manifest an intention to be bound by a post-incorporation contract on the relevant terms of the ASP Agreement?

Majority Decision

Justice Côté penned the majority decision, with Chief Justice Wagner and Justices Abella, Moldaver, Karakatsanis, Brown, Martin, and Kasirer concurring. Justice Rowe, by himself, provided a partial dissent. Rowe J. stated that part of the majority’s decision was a finding of fact and that the Court should remit this part back to the trial courts.

An Exception to Positive Covenants Not Binding Subsequent Purchasers

Strata Co. made three sub-arguments to this issue:

  1. That there is no difference between enforcing a post-incorporation contract and enforcing a burden of a positive covenant (Strata, para 19);
  2. That a corporation entered into a post-incorporation contract that concerns interest in land would create a “novel mode of holding and enjoying real estate property interest” (Strata, para 21); and,
  3. That a need for certainty in the ascertainment of title and incidental rights justifies limited freedom of contract when the agreement relates to a post-incorporation contract concerning interest in land (Strata, para 22).

Côté J. dismissed all three arguments and found that terms affecting land interest do not invalidate an otherwise valid and effective post-incorporation contract.

In response to argument one, although common law courts are reluctant to impose real covenants absent privity of contracts, Côté J. found that this reluctance does not apply in this situation, where the successor in title (Strata Co.) assumed the covenant by way of contract (Strata, paras 19-20).

In response to argument two, Côté J. found nothing novel or prohibitive about a corporation entering into a post-incorporation contract that affects land (Strata, para 21). Lastly, Côté J. reiterated that strata corporations are deemed “natural persons” by the SPA. Therefore, a strata corporation’s conduct creates a reasonable expectation that an agreement is legally binding (Strata, para 23).

Finding Parties Entered into a Post-Incorporation Contract on Same Terms

Strata Co. argued that there was no post-incorporation contract without an agent who intended such when it entered into the pre-incorporation contract. However, Côté J. resolved that this is not relevant as the “pre-incorporation contracts are strangers to the post-incorporation contract.” And so, the parties’ intentions at the pre-incorporation contract cannot be determinative on the issue (Strata, para 34). Instead, the applicable test to find whether a post-incorporation contract exists is the same as any other contract: offer, acceptance, consideration, and terms inferred from parties’ conducts and surrounding circumstances (Strata, para 37).

Entering into Post-Incorporation Contract by Conduct

Strata Co. made two sub-arguments related to this:

  1. That a post-incorporation cannot exist based on conduct because it is inconsistent with how a strata council makes decisions and exercises power (Strata, para 41); and,
  2. That a post-incorporation contract existing based on conduct allows the Developer to enter into self-serving contracts in the capacity as the developer and the initial strata property owner (Strata, para 42);

Côté J. dismissed Strata Co.’s arguments. She stated that strata corporations, as outlined by the SPA, are natural persons subject to contracts developed through objective conduct due to the Reasonable Expectations Doctrine (Strata, para 39). Côté J. also dismissed the second argument as BC laws included protections to strata lot purchasers in these cases — i.e., when the developer owns the strata corporation, it is obligated to act in good faith, in the best interest of the strata corporation, and exercise the care, diligence, and skill of a reasonably prudent person. Lastly, Côté J. noted that it is crucial to maintain the principle of contract formation for strata corporations. Otherwise, it would undermine commercial certainty and thwart reasonable expectations (Strata, para 42).

Objective Intention to be Bound by Post-Incorporation Contract on Terms of ASP Agreement

Côté J. agreed with the BCCA that Strata Co. manifested an intention to be bound by a post-incorporation contract on the terms of s. 7.5 of the ASP Agreement. Crystal parking manifested an offer by making the parking available to Strata Co. members. In return, Strata Co. members paid consideration through parking fees. A reasonable person in Crystal Parking’s position would consider that this was an assent of the terms in s. 7.5 of the ASP Agreement (Strata, paras 49-50). Therefore, Côté J. found that the BCCA’s decision that Strata Co. entered into a post-incorporation contract by conduct to be correct.

Dissent

Rowe J. disagreed that Strata Co. manifested an intention by way of objective conduct to be bound by a post-incorporation contract. Instead, he argued that the majority made a finding of fact different from the trial judge. Therefore, he would remit whether Strata Co. manifested an intention by way of objective conduct as a question for the trial court (Strata, paras 75-76).

Rowe J. agreed that there is “no principled reason to exempt post-incorporation contracts from generally applicable contract law principles.” However, he stated that conduct indicating reasonable acceptance of an offer could only act as persuasive evidence that a party accepted a post-incorporation contract. He then set out three inferences that a trial court may perceive the conduct as (Strata, para 81):

  • Pre-Existing Obligation: The trial court may perceive that Stara Co. performed a pre-existing obligation. Strata Co. paid the Developer a parking fee before the parking lot’s sale and formed a contract. Payments to Crystal Parking may have been a continuation of this contract (paras 85–87).
  • Mistaken Pre-Existing Obligation: The trial court may find that Strata Co. mistakenly performed what it thought to be a pre-existing obligation. It would not be fair for Crystal Parking to take Strata Co.’s payment as an acceptance of a new obligation under this context (Strata, para 93).
  • Conditional Easement: The trial court may find that the ASP Agreement formed a conditional easement and that Strat Co.’s payment was an exercise of an option as such. In a conditional easement, if the positive action (payment by Strata Co. members) is not performed, the only remedy for Crystal Parking is to refuse to grant the benefit (allow members to park) (Strata, paras 98-99).

Implications

In TheCourt.ca’s analysis of the BCCA decision, Stacey Blydorp questioned how the SCC would evaluate and comment on the principles set out in Heinhuis v Blacksheep Charters Ltd, 1987 BCCA 239 [Heinhuis]. Heinhuis set out that “A pre-incorporation contract may be enforced where the company and the other party to the contract make a new contract after incorporation on the same terms as the pre-incorporation contract” (Heinhuis, para 12).

The majority ultimately concurred with the BCCA and read that Heinhuis was not a departure from the framework that the majority reiterated. Côté J. went on to state that although former Chief Justice McLachlin (when she sat on the BCCA) did not find a need to engage in an analysis in traditional terms of offer, acceptance, and consideration in Heinhuis, she was prepared to do so (Strata, para 36).

The majority determined that Strata Co. manifested an intention to be bound by the post-incorporation contract, post-Crystal Parking’s purchase of the ASP, by paying the parking facilities fees contemplated by the ASP Agreement and using the parking spaces. Côté J. took a traditional approach to contract formation and applied it equally to post-incorporation contracts as it does to any other contract. Her analysis ultimately reaffirms the laws surrounding pre- and post-incorporation contracts.

The post <em>Owners, Strata Plan LMS 3905 v Crystal Square Parking Corp</em>: Parking Within the Lines of Contract Law appeared first on TheCourt.ca.