One Sunday each month OnPoint Legal Research provides Slaw with an extended summary of, and counsel’s commentary on, an important case from the British Columbia, Alberta, or Ontario court of appeal.
Price Security Holdings Inc. v. Klompas & Rothwell, 2019 BCCA 36
AREAS OF LAW: Property; Leases; Trusts; Beneficiary; Standing to sue third-party debtor
~Special circumstances must be established to justify a departure from the general rule that a beneficiary cannot directly sue a third-party debtor of the trust.~
Fort Quadra Holdings Ltd. is the registered owner of a commercial building in Victoria. The Appellant, Klompas & Rothwell, has leased office space in the building since 1985. The landlord and the Appellant entered into the last of their written leases on July 29, 2002. The lease was in effect until December 31, 2007. In 2006, the beneficial interest in the property was sold to a party whose identity was not established with certainty in the proceedings, but it may have been two trusts related to the Respondent, Price Security Holdings Inc. Registered title remained in the name of the landlord. Evidence was led to indicate that this was done for tax purposes, which the Appellant said was to avoid the requirement to pay property transfer tax. A document executed in December 2009 indicated that the Respondent had acquired beneficial ownership of the property and that it appointed the landlord as its bare trustee and agent to hold legal title to the property. The lease expired at the end of 2007 without the right of renewal being exercised, and no new lease was executed. The Appellant continued to occupy the space, but was not prepared to sign extension agreements that set the rent at $14 per square foot per year. The Appellant took the position that this rate was too high. It continued to pay at this rate for several years, however. In July 2014, the Appellant stopped paying the rent. The Respondent agreed in February 2016 to sell the beneficial interest in the property and the shares in the landlord to PC Urban (Acquisitions) Corp., which in turn assigned it to Pacific Arbour Six Residences Ltd. All lease agreements were subsequently assigned to Pacific Arbour. After the sale completed, the Respondent’s property manager emailed the Appellant, requesting an update on the status of the payment of rent arrears. The Respondent commenced this action in March 2017. The notice of civil claim requested judgment against the Appellant for rent arrears at the 150% overholding rate, interest at prime plus 3%, and solicitor and own-client costs. The notice of civil claim asserted that the Respondent had made written demands to Pacific Arbour that it cooperate to enforce landlord rights against the Appellant, including the use of the landlord (Fort Quadra Holdings) to sue the Appellant, and that Pacific Arbour had refused to cooperate. The Respondent sought an injunction against PC Urban and Pacific Arbour for them to cooperate with the Respondent to enforce the landlord rights and the terms of the lease, and to seek all available remedies in respect of the rent arrears owing. No relief was sought against Fort Quadra Holdings itself. The summary trial judge found that none of the exceptions to the doctrine of privity had been established. She considered the issue of exceptions to the general rule that beneficiaries of a trust cannot directly sue a third-party debtor of that trust. She concluded that the sale agreement demonstrated an intention of the parties for the Respondent to continue to hold a beneficial interest in the property, namely the amounts alleged to be owed by the Appellant. She reviewed the three prerequisites set out in Stoney First Nation and concluded that the Respondent had satisfied them all. She rejected the 50% increase in rent for the overholding tenancy, but held that the Respondent was entitled to interest at prime plus 3% and costs as requested.
The appeal was allowed. The Appellant raised the question of whether the matter was suitable for summary trial, whether the Respondent had standing to directly sue for the rent arrears, and whether solicitor and own-client costs should have been awarded. The Court of Appeal found that the judge’s exercise of discretion in finding the matter suitable to summary disposition was entitled to deference. On the issue of privity of contract, the Court of Appeal considered the jurisprudence that underpins the decision in Stoney First Nation. The Court noted that the summary trial judge never considered whether there were special circumstances justifying a departure from the general rule that a beneficiary cannot directly sue a third-party debtor of the trust, as required in Stoney First Nation. The appropriate remedy in these circumstances was to order a new trial.
Comments provided by Stephen Lyons, Counsel for the Appellant:
“This decision confirms that there has been no softening of the doctrine of privity of contract in British Columbia, beyond the traditional exceptions of agency and trust and the principled exception articulated in London Drugs Ltd. v. Kuehne & Nagel International Ltd., 1992 CanLII 41 (SCC),  3 S.C.R. 299 and further developed in Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., 1999 CanLII 654 (SCC),  3 S.C.R. 108. It also embraces a line of authority following Sharpe v. San Paulo Railway Co. (1873), L.R. 8 Ch. App. 597 and earlier decisions that a beneficiary cannot sue a third-party trust debtor directly and must act through the trustee except in special or extraordinary circumstances. The Court of Appeal in the present decision noted that “some confusion in the jurisprudence” may have arisen from Hayim v. Citibank N.A.,  A.C. 730 (P.C.), which reviewed various relevant authorities as obiter dicta but confirmed the requirement for special or extraordinary circumstances. A later series of Alberta decisions had identified “three prerequisites” to be met in addition to the requisite special circumstances. The Court of Appeal found that the trial judge had relied on the Alberta authorities in considering the three prerequisites and had erred in failing to consider whether special circumstances were also present. A later Alberta decision not considered by the trial judge was criticized as effectively removing the requirement for special circumstances and reducing the test to a mere refusal to sue by the trustee.
The decision is not, however, simply a recapitulation of jurisprudence regarding the doctrine of privity of contract and the standing of a beneficiary to sue a third-party trust debtor directly. The importance of these principles arises mainly from the certainty they bring to a bargain, but they also speak to broader themes of commercial justice which were argued by the parties on appeal.
One theme which emerged on appeal was the tension between commercial expediency and the rights of commercial parties. The Respondent argued that the parties were sophisticated commercial actors who had fully understood the bargain that they were making and could not now stand on technicalities. Other common-law jurisdictions, it was suggested, had moved in recent years towards expedited resolution of commercial disputes, including softening or abrogating the doctrine of privity of contract and blunting other such technical rules in a commercial setting. The Appellant took the position that while process may be abridged or expedited in a commercial context, no lesser standard of substantive law ought to apply to commercial parties, who are entitled to rely on any relevant rights and defences, however technical. The Respondent further argued that questions of standing had implications beyond the procedural and technical, and that such long established common-law rules encoded substantive justice and ought not to be lightly set aside.
The unique facts of the case were challenging for both parties. One view of the facts is that a commercial tenant fell two years behind on rent and failed to pay on demand. Another view is that the person making the demand was a stranger to the lease and not the landlord, and by the time the demands were made was at best a former owner of the landlord. For the entirety of the tenancy (and it seems to the present day), the legal and registered owner of the premises was the same holding company, named as landlord on the lease. It was never clear on the facts before the Court why the holding company and its new owners did not participate more actively in the litigation and maintained such an equivocal position. If the holding company had commenced this action as plaintiff, the defences of privity and standing which were so pivotal in the appeal decision would have never arisen.”