A Red Flag for Municipalities & Developers: Supreme Court of Canada Decides Not Every Positive Covenant Under a Development Agreement Runs With the Land in Heritage Capital Corp. v. Equitable Trust Co.

On May 6, 2016, the Supreme Court of Canada generally affirmed the common law rule that positive covenants do not run with the land. More specifically, the Court decided that in Alberta, legislative provisions respecting payments in exchange for restrictive covenants under the terms of a development agreement between a property owners and the municipality don’t, and the subsequent owner didn’t, gain the right to the remaining payments under that agreement. While this decision specifically applies to Alberta historical protection legislation (the Historical Resources Act), it’s relevant to other Canadian provinces since most allow municipalities or similar bodies to enter into development or other agreements to incentivize or restrict development – and it raises a red flag where developers and municipalities have entered, or are considering entering, development or other agreements that include compensation from the municipality back to the developer or property owner.

In Heritage Capital Corp. v. Equitable Trust Co., the municipality and a property developer entered into an agreement pursuant to the Alberta Historical Resources Act to place restrictive covenants against the property respecting its development in exchange for a series of payments from the municipality to the property owner. Ownership of the property subsequently changed hands through a judicial sale. Section 29(3) of the Historical Resources Act specifically provides that, “[a] condition or covenant registered under subsection (2) runs with the land and the person or organization under subsection (1) that entered into the condition or covenant with the owner may enforce it whether it is positive or negative in nature and notwithstanding that the person or organization does not have an interest in any land that would be accommodated or benefited by the condition or covenant.” The question was whether the purchaser was entitled to the remaining payments from the municipality under the agreement.

The Supreme Court of Canada decided that in this case, it’s not: the common law (that is, judge-made law as opposed to legislation) rule is that positive covenants don’t run with the land – and the Historical Resources Act provisions respecting the payments doesn’t override this rule with respect to the compensation payable, and the subsequent owner didn’t gain the right to the payments.

In its broadest sense, this decision affirms the common law rule that positive covenants do not run with the land. But more narrowly, this decision raises a red flag for developers and municipalities that have or are considering entering into development agreements (and subsequent purchasers, particularly those that purchase from a property developer or through a judicial or bankruptcy sale) that include compensation from the municipality back to the developer or property owner:

Read the law. Whether a subsequent owner would automatically, on taking ownership, be entitled to previously agreed compensation from a municipality (or similar body) depends upon any legislation allowing the municipality (or similar body) to enter into such agreement. Most municipalities (or similar bodies) have the ability to enter into development or other agreements to incentivize or restrict development, though the sources of the ability varies; it could be found in, for example, under legislation governing the authority of municipalities, community planning or historical protection. Municipalities and developers or property owners must carefully review the relevant legislation to determine what in fact runs with the land – and what does not. This case illustrates that not all provisions of such an incentive agreement are equal in that respect. This decision resolves the specific question in the context of the specific legislation (the Alberta Historical Resources Act). That Act is clear that positive covenants in the municipality’s favour will run with the land, but it’s silent respecting any payments the municipality agrees to make to the landowner.

The form of the compensation. This could also affect property developers and subsequent owners where the compensation for restrictive covenants is by way of some form of reduced tax rate on the land. In this case, the agreement between the owner and the municipality provided for payments to the then land owner. But under section 28(4) of the Alberta Act (and in other provinces, under the applicable by-law or legislation), the compensation to the owner could have been by way of tax relief. The form of compensation shouldn’t change the outcome – but tax relief would be a bit more complicated to deal with than monetary payment(s) because a subsequent owner wouldn’t be entitled to the tax relief while the previous owner, that no longer pays the taxes, would.

Please contact your McInnes Cooper lawyer or any member of our McInnes Cooper Real Estate Team to discuss this topic or any other legal issue.

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