When purchasing property under a Partnership Agreement, disputes may arise. Ensuring that everyone is on the same page throughout a given process can be challenging when working with multiple parties. If a dispute arises which may impact the property, individuals may seek to obtain a certificate of pending litigation in order to warn potential buyers or renters that the property may be subjected to legal proceedings.
A certificate of pending litigation is a document which puts potential buyers or tenants of a property on notice that the property may be subject to legal action.
According to Ontario real estate law, mortgage lenders are parties which commonly deal with certificates of pending litigation. If a lender requires a certificate of pending litigation before approving a mortgage application, it must be provided to them within 30 days of the mortgage application.
A certificate of pending litigation can be issued by either the plaintiff or the defendant in a lawsuit. Often, it is issued by whoever initiated legal action. The certificate of pending litigation must include specific information about where and when the legal action was filed, what matters are being contested, how long it has been pending, who issued the certificate (along with confirmation of their authority to do so), and evidence to support its accuracy.
The Courts of Justice Act empowers a court to issue a certificate of pending litigation when an individual’s interest in land is in question. The test for issuing a certificate of pending litigation was set out in Perruzza v Spatone as follows:
“(ii) The threshold in respect of the “interest in land” issue in a motion respecting a CPL (as that factor is set out at section 103(6) of the Courts of Justice Act, R.S.O. 1990, c. C.43) is whether there is a triable issue as to such interest, not whether the plaintiff will likely succeed […];
(iii) The onus is on the party opposing the CPL to demonstrate that there is no triable issue in respect to whether the party seeking the CPL has “a reasonable claim to the interest in the land claimed” […];
(iv) Factors the Court can consider on a motion to discharge a CPL include (i) whether the plaintiff is a shell corporation, (ii) whether the land is unique, (iii) the intent of the parties in acquiring the land, (iv) whether there is an alternative claim for damages, (v) the ease or difficulty in calculating damages, (vi) whether damages would be a satisfactory remedy, (vii) the presence or absence of a willing purchaser, and (viii) the harm to each party if the CPL is or is not removed with or without security[…]; and
(v) The governing test is that the Court must exercise its discretion in equity and look at all relevant matters between the parties in determining whether a CPL should be granted or vacated […].”
In Hassanzadeh v Davoodi, the plaintiffs commenced a motion requesting that the Superior Court of Justice order a certificate of pending litigation be dismissed. The plaintiffs and the defendants were partners in a Partnership. The plaintiffs had a combined 27.73% interest in the Partnership, while the defendants held a combined 72.27% interest. A dispute arose as to the interpretation of the Partnership Agreement that all parties had entered into.
The dispute pertained to a property that was purchased in 2021. The parties entered into an Agreement of Purchase and Sale on August 23, 2021, and the sale closed on November 19, 2021. The defendants took title of the property as its registered owners. The parties obtained a mortgage from Canadian Imperial Bank of Commerce.
The Partnership Agreement specified that the parties formed the partnership as a vehicle to purchase and develop property. The intended plans for the property involved constructing an addition to the existing home and adding a second storey. One of the parties applied for a zoning certificate with the City of Toronto. However, the application was refused on May 10, 2022, and was not appealed yet.
The property remained vacant and instead of continuing with the original plans, the defendants (the registered owners) sought assistance from the Court regarding “rescission of the Partnership Agreement, an order dissolving the partnership under section 35 of the Partnerships Act and, in the alternative, an order under the Partition Act directing a partition and sale of the Property.”
The plaintiffs indicated their preference was to keep the property and rent it until arrangements can be made to continue the project as planned, although no concrete plans existed at the time of trial.
After considering the test set out in Perruzza v Spatone, the Court found that there was indeed a triable question regarding an interest in the land. Therefore, it was up to the Court to exercise its discretion as to whether a certificate of pending litigation was appropriate under the circumstances.
The Court noted that there was nothing unique about the property, which weighed against the issuance of a certificate of pending litigation. Additionally, the parties’ clear intention was to acquire the property as an investment, complete renovations, and sell the property for a profit. These factors were weighed against the issuance of the certificate of pending litigation.
While the plaintiffs did not claim damages, they sought declaratory relief that the partnership would remain intact and that the defendants had committed breaches of trust. While a claim without damages actually weighs in favour of a certificate of pending litigation, the Court held that it was not determinative in these circumstances.
Since the parties intended to use the property as a profit-making vehicle, the Court found that damages should be an adequate remedy. Moreover, the plaintiffs were not contributing to the mortgage payments on the property; therefore, the defendants argued that they did not want to be solely financially liable for the mortgage payments while litigation took place. Ultimately, the defendants did not want to continue to work with the plaintiffs on this project or any future transactions.
The Court weighed each factor in this case and chose to exercise its discretion by rejecting the plaintiffs’ application for certificate of pending litigation.
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