They Used my Money to Buy that Property. Can’t Encumber it?

It is a common question: when you lend someone money, they use that money to purchase land and the money is not paid back, can you somehow secure repayment by encumbering title to the land? Clients often ask about whether they can “lien” or tie up real property for their debts and are curious whether there is any means to secure a debt or encumber land before judgment.

With a mortgage or security agreement, generally the means of encumbering land based on an alleged interest in that property is through a certificate of pending litigation or CPL. In BC, the Land Title Act provides that CPLs can be registered against real property by a person who has commenced a proceeding or is a party to a proceeding that has commenced who claims an estate or interest in land or is given a right of action in respect of land by statute. Land with a CPL registered on it prevents other instruments being registered on it or sold or transferred except in specific circumstances.

In the recent decision of Beijing Tian Zi Property Group Trading Ltd. v Jia, 2021 BCSC 423 (CanLII) the Supreme Court tackled questions about when a lender can or cannot seek to register a CPL against the lands of a debtor.

In Beijing Tian, the plaintiff sought to cancel CPLs registered by the defendant against the plaintiff’s lands. The underlying dispute was complex, involving allegations that the defendant misappropriated funds from the plaintiff’s bank account. The defendant alleged that the money taken was authorized and was a partial payment for purchase of his shares and that he was owed a substantial additional amount. The defendant’s position was altered and his pleadings were amended alleging the repayment of a loan related to the taken funds. He alleged he had an equitable interest in the form of a constructive trust over the lands he registered CPLs against.

In its analysis, the Court held that whether the CPLs could be maintained required an examination of the court filings and whether those filings demonstrated the defendant alleged a proper interest in the lands which could support a valid CPL. The Court stated at para. 16 that “The key issue in this case is whether [the defendant’s] pleadings are capable of giving rise to an interest in land.”

The Court held that the defendant’s claims were based on the funds he allegedly lent to the plaintiff being used to acquire, preserve, maintain and improve the subject lands. The defendant alleged he performed work on the lands and maintained and cared for them.

The court at paras. 26 and 28 cited the following passages from Nouhi v. Pourtaghi2019 BCSC 794:

A party seeking either type of constructive trust must satisfy two criteria, in addition to the cause of action or circumstances on which the remedial or substantive constructive trust is based. The first is that there must be referential property, i.e. the plaintiff must demonstrate a substantial and direct link, a causal connection or a nexus between the claim and the property upon which the remedial constructive trust is to be impressed… The second is that the plaintiff must demonstrate that a monetary award is inadequate, insufficient or inappropriate in the circumstances…

[An application to strike a CPL] requires the court to determine whether the pleadings disclose a claim to an interest in land so as to support a certificate of pending litigation. …[T]he party who filed the certificate of pending litigation may not maintain the certificate when the pleadings were inadequate to disclose a claim to an interest in land at the time the certificate was filed. If the pleadings were not adequate when the certificate was filed, the certificate was never valid and is immediately cancelled… In such a case, the plaintiff can seek to amend the pleadings and then file a valid certificate of pending litigation in the event that the amended pleadings disclose a claim to an interest in the land… [citations omitted].

In completing its analysis, the Court determined that the defendant’s claim failed to give rise to an interest in land. There was no direct link, causal connection or nexus between the claim and impugned lands to give rise to a remedial constructive trust. Pleadings were insufficient to support the notion that a monetary judgment would be inadequate, insufficient or inappropriate, which the court found was necessary to permit the CPLs to continue.

The Court found that ultimately the defendant’s claim was one seeking a monetary judgment. There was no connection between the funds alleged to be loaned and the lands. Providing a loan where the funds lent might be used to purchase property does not, in and of itself, establish an interest in land.

The Court was clear that the defendant could seek to amend his pleadings to properly allege an action supporting a CPL, if such basis existed.

Beijing Tian is an important reminder that simply because someone might owe another person money does not mean that there is any ability of the creditor to encumber lands owned by the debtor prior to judgment. Whether the funds lent were used to purchase lands can be immaterial. There can be circumstances in which lent funds could give rise to a valid CPL, but generally not in the situation of a basic loan. Further, a party wishing to secure loaned funds should avoid any arguments about the validity of any CPL it might later file by properly drafting and having a debtor execute security agreements and/or a mortgage.

It is notable that Pre-judgment garnishment can also be considered as a means to effectively secure a debt claim before judgment, but does require knowledge of the debtor’s banking information and/or other financial affairs to be successful.

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