LAWPRO^®'s Winning Ways
Debra Rolph
Director of Research, Claims
Date: September 2002

In its continuing efforts to protect the real estate bar, LPIC, now LAWPRO, has litigated many cases on behalf of its insured members. One went to the Supreme Court of Canada. Four others went to the Ontario Court of Appeal. Others simply went to trial. In some of those cases, it can truly be said that LPIC's wins averted havoc for the Ontario real estate bar.

Had LPIC lost Friedman Equity Developments Inc. v. Final Note Limited; Robins, Appleby & Taub
(T.P.)¹, the consequences for Ontario real estate lawyers would have been dire. A mortgage lender made a concerted effort to overturn the "sealed contract" rule in order to reach the personal assets of investors in the shell company which had given the mortgage. The investors and their solicitor had relied on the well established doctrine that a mortgage is a contract under seal, and since the investors were not parties to the mortgage, they could not be personally liable on it. When the investors were sued, they issued a third party claim against their solicitors. In the ensuing litigation, the mortgage lender relied on the fact that the "sealed contract rule" has received considerable academic and judicial criticism, and argued that the time had come to repeal it. This litigation was taken all the way to the Supreme Court of Canada. In late July, 2000, the Supreme Court ruled against the plaintiff mortgage lender. While the "sealed contract" rule is archaic, it is not unjust or commercially inconvenient. The Court was unwilling to create uncertainty and unfairness but abolishing ex post facto a rule on which so many transactions were based.

A trilogy of judgments from the Ontario Court of Appeal establish the proposition that a solicitor will rarely be liable for failing to renegotiate an agreement of purchase and sale which is fully binding at the time of the solicitor's initial retainer.

The difficulties began with judgment of Gotlib, J. in Wong v. 407527 Ontario Ltd.², which was the subject of considerable consternation. The defendant solicitor was retained to close a purchase of a commercial property. The agreement of purchase and sale was fully executed at the time of his retainer. The agreement made no provision for security for the vendor's warranty regarding rents. After closing, the vendor defaulted on its warranty and became bankrupt. Gotlib, J. held that the solicitor was negligent in failing to attempt to negotiate security, even though the clients were keen to close the transaction, and did not ask for advice on obtaining additional security, or in improving the agreement in any way.

Cullity, J. applied the Wong judgment in Vaz-Oxlade v. Volkenstein³. This time, the defendant solicitor was retained to act for the plaintiff on the purchase of a cottage. The agreement of purchase and sale had already been fully executed at the time of his retainer. It contained a warranty to the effect that the septic system was in working condition, and complied with the local health authority's requirements. The solicitor failed to make inquiries of the local health unit concerning the septic system. Had he inquired, he would have learned that no records were available. The trial judge found that the vendors' warranty was complied with. The septic system did work. Although it did not comply with modern standards, it was a "non-conforming use" in that it complied with the standards set when it was constructed many years previously. The trial judge dismissed the plaintiff's action against the vendor and the real estate agent, but held that the solicitor was liable for the plaintiff's loss of opportunity to negotiate an abatement.

LPIC immediately appealed both the Wong and Vaz-Oxlade judgments. The Court of Appeal reversed the Wong judgment⁴. Laskin, J.A. held that the trial judge was not sensitive enough to the limitation on the solicitor's retainer. The Court found it hard to admonish the solicitor, let alone make a finding of negligence against him, for failing to negotiate something to which his clients had no legal entitlement.

In late July, 2000, the Vaz-Oxlade appeal was heard. The Court of Appeal held that there was no basis for distinguishing Vaz-Oxlade from Wong, and allowed the solicitor's appeal.

The third case in this trilogy was Baker v. Turville⁵. The plaintiffs retained the defendant solicitor to represent them in a property purchase after the purchase agreement was "firm." After closing, the solicitor inquired of the local health unit whether the property's septic system complied with its regulations. The health unit responded that it had no record of the septic system. The solicitor did not disclose this response to his clients. The septic system operated without complaint for five years, at which point, the plaintiffs' tenants began to complain about problems with the system. The plaintiffs abandoned the premises. It was conceded that the defendant solicitor did not meet the standard of care in the circumstances. However, Pitt, J. held that the plaintiffs did not establish that they would not have closed the transaction had proper disclosure been made. Nor did they establish that the problem with the septic system caused their ultimate loss. Their abandoning the premises was the real cause of their loss. The action was dismissed. Pitt, J. assessed damages at $4,500 should it later be found that the plaintiffs were entitled to some damages. The plaintiff appealed. The Court of Appeal, dismissed the appeal, holding that it had no merit. The solicitor received solicitor-client costs.⁶

The judgment of Mossip, J. in Silaschi v. 1054473 Ontario Ltd.,⁷ was a source of considerable commentary and chagrin in the real estate bar. This judgment declared that a vendor's lien for the unpaid purchase price of land had priority over a first mortgage registered against the land on closing the sale. This was true notwithstanding that the vendor obtained a second mortgage as security, that it was intended by all parties that this security stand second to the first mortgage, and that the first mortgage proceeds were intended to fund the construction of a house and thus increase the equity available to both mortgagees.

LPIC successfully appealed this judgment on behalf of the first mortgagee⁸. Carthy, J.A. noted the vendor's lien is a creation of equity. It would be inequitable to allow a vendor to enforce his lien against the first mortgagee in these circumstances. Their agreed priorities, as evidenced by the order of registration, would be reversed, and the business sense of the transaction skewed. The Court gave the real estate bar the benefit of this guidance: "It must invariably be the case that a vendor's lien gives way to a first mortgage when the first and second purchase money mortgage are placed on title on closing."

In summary, had LPIC not succeeded in these five cases, the real estate bar would have faced turmoil in matters governed by the "sealed contract rule," and in respect of priorities between first mortgages and vendor's liens. Many claims would have been engendered. As well, practitioners would have faced exposure for failing to attempt to improve on "firm" agreements.

LPIC/LAWPRO has enjoyed considerable success in combating claims against real estate solicitors brought by non-clients. One prominent example is Budrewicz v. Stojanowski. Mrs. Budrewicz, a widow of modest means, asked a family friend, Stojanowski, to help her invest $80,000. Stojanowski promised that he could get 15% per annum by loaning the money to business acquaintances. Stojanowski retained solicitor Boguski. Stojanowski told Boguski that he was loaning money to people called Simkhev at 20% per annum, to be secured by a mortgage. He did not tell Boguski that the money was coming from Mrs. Budrewicz. On the day of the closing of the mortgage transaction, Stojanowski did bring a cheque to Boguski's office, drawn by Mrs. Budrewicz. Shortly after the funds were advanced, Stojanowski instructed Boguski to prepare a promissory note and a direction and authorization in favour of Mrs. Budrewicz, which was done. The mortgagors eventually defaulted and declared bankruptcy, as did Stojanowski. Mrs. Budrewicz sued Boguski, alleging breach of a duty of care owed to her, breach of trust, and breach of fiduciary duty.

Webber, J. held that the following factors negated a duty to Mrs. Budrewski

	1.	There was no advice or undertaking given to Mrs. Budrewski.
	2.	There was no evidence that the court was willing to accept that Mrs. Budrewski relied upon Boguski to protect her interests.
	3.	There were no direct dealings between Boguski and Budrewski.
	4.	In order to discharge a duty of care to a non-client, a solicitor may be obliged to disclose information which his true client did not wish disclosed. This is most unfair where the true client did not consent to the solicitor undertaking any duty to the non-client.
	5.	A solicitor cannot be expected to protect the economic interests of a non-client, unless in all the circumstances the non-client reasonably relied on the solicitor and the solicitor knew or should have known of the reliance.

Mrs. Budrewicz's action was therefore dismissed.

Budrewicz was shortly thereafter followed by Banzon v. Madsen and Hoyt et al.¹⁰. The defendant solicitor Hoyt received a surprise visit to his office. One visitor, Madsen, was a client. The other two - Mr. and Mrs. Banzon - he had never dealt with before. Hoyt was shown an agreement which the parties had drawn up and executed without his advice. The Banzon's had agreed to buy a 50% interest in a company owned by Madsen for $200,000. Of that sum, the Banzons were to pay $100,000 cash. They were also to assume responsibility for $100,000 worth of mortgages on the subject property. The company owned a property on which a flea market business was conducted. The following day, Hoyt received a certified cheque from the Banzons in the amount of $100,000. He paid this into his trust account, and then disbursed the money in accordance with his client Madsen's instructions.

The Banzons quickly became disenchanted with the flea market business. They wanted their capital back. Their action against Hoyt was also dismissed. There was no solicitor-client relationship between themselves and Hoyt. They did not ask for, nor receive, Hoyt's advice. Since the $100,000 belonged to Madsen, Hoyt was entitled to disburse it on Madsen's instructions There was no credible evidence that the plaintiffs reasonably relied on Hoyt, and that Hoyt was aware of this reliance.

Mancuso et al v. York Condominium Corporation No. 54 and Harris Sheaffer,¹¹ The defendant solicitors were instructed by their client, York Condominium Corporation No. 54 to prepare and register a notice of lien against a property which one plaintiff owned, and the other plaintiff occupied as tenant. The defendant solicitors also served a notice of sale under lien, again on their client's instruction. The plaintiff sued the Corporation on the basis that no special assessment was owing, that the lien was not properly registered and perfected, and the costs claimed were unconscionable. The plaintiffs also sought damages against the law firm. The claim was struck out. The solicitors acted as agents of their client throughout, and they owed no separate duty of care to the plaintiffs.

LPIC/LAWPRO is sometimes in the happy position of defending an insured who has done no wrong.

In White v Bryant¹² the claimant purchaser retained our insured after he had signed a purchase agreement. The defendant solicitor could not be held liable if the purchase agreement did not reflect the purchaser's understanding of the transaction.

In Value Village Stores Inc. v. Battlefield Square General Partner Inc. and Goodwill, the Amity Group¹³, LAWPRO argued a landlord's position. Had the landlord been unsuccessful, a very expensive claim against its solicitor would have ensued. The landlord of a shopping plaza entered into a lease with the anchor tenant, whose lease provided that the landlord would not permit the sale of second hand clothing in the shopping centre. This has long been characterized as a "character" clause in a shopping centre lease. The anchor tenant sublet the premises to Value Village Stores, whose main business was the sale of second hand clothing. The landlord consented to the sublease. Value Village did not request a non-competition agreement. Subsequently, the landlord entered into an offer to lease for another store in the plaza with Goodwill, whose primary business was also the sale of second hand clothing. Value Village brought an application for an injunction to prevent the leasing to Goodwill on the basis that the character clause was also a non-competition clause.

Backhouse, J. dismissed the application. In her opinion, this clause was intended to prevent a diminution of the reputation of the shopping centre. Value Village was attempting to turn a clause which has nothing to do with competition into a clause restricting the landlord's right to lease to a competing business. It would be inequitable to enforce this provision. Obviously, Value Village waived the character clause when it leased premises for a purpose contrary to the character clause. There is no reason why it should now be entitled to rely on the clause, the purpose of which ended with its own sub-lease.

Imposters and forgers have been a great source of problems to the real estate bar over the past ten years. In Re Raina and the Land Titles Assurance Fund¹⁴ LAWPRO represented a defrauded lender before the Land Titles Assurance Fund, even though the lender's solicitor had done nothing wrong.

Ms. Raina purchased a property in Richmond Hill in April, 1999. She gave a charge to the Royal Bank of Canada. Six months later, unbeknownst to Raina, Emanuele Tesoro fraudulently transferred the title to the property to himself. He then fraudulently discharged the Royal Bank of Canada mortgage, and gave a fresh charge to Ila Weiser and Midking Investments limited for $350,000. The solicitor who Tesoro and Weiser/Midking in the placement of that mortgage requested a photo ID from Tesoro, and received it. The Weiser/Midking charge was also fraudulently discharged in December 1999. Two months later, Tesoro gave a charge to Equitable Trust Company in the amount of $252,5000. Tesoro eventually went to prison, but none of the stolen money could be traced.

Ms. Raina sought relief from the Land Titles Assurance Fund, as did Weiser/Midking Investments. In a decision by the Deputy Director of Land Titles, Ms. Raina was awarded the sum of $725,498.29, on the understanding that this money would be given to Ila Weiser/Midking Investments and Equitable Trust to discharge their mortgages. The Deputy Registrar ordered that title be rectified to show Ms. Raina as registered owner and to reinstate the Royal Bank charge. Raina and Weiser/Midking were awarded their costs.

A recent case held that a solicitor cannot be held liable for failing to achieve the impossible¹⁵ - Piccolo v. Katzman et al. The defendant Katzman acted for the plaintiffs in a first mortgage transaction. The mortgage money was used to pay municipal taxes; a tax sale of the property was imminent. Katzman learned that two constructions liens totalling $40,000 were also registered against the property. The construction lien actions were being defended on behalf of the plaintiffs by another local solicitor, Leslie. Leslie had not been paid, and shortly thereafter got off the record. Katzman was able to negotiate a settlement with the lien claimants, such that they accepted a second mortgage of $20,000 in settlement of their lien claims. The first mortgage was registered, and the tax arrears paid. Katzman and the mortgage broker received a third mortgage to secure their fees. The plaintiffs sued Katzman on the basis that he negligently advised them concerning the construction lien claims. They alleged that Katzman should have counselled them to pay $40,000 into Court to secure the release of the claims, and further, to have arranged for Leslie to continue representing them. The plaintiffs further claimed that the lien claims out to have been settled for 10 cents on the dollar, rather than 50 cents on the dollar.

The Court allowed Katzman's application to summarily dismiss the plaintiffs' action. The Court accepted that the plaintiffs had no ability to raise the funds for the purpose of a payment into court, or to satisfy Leslie's account or retainer requirements. The foundation of a solicitor's negligence claim cannot be the failure to advise the plaintiffs in respect of options which were not practical. The plaintiffs presented no evidence to support a conclusion that the settlement which Katzman negotiated was improvident in the circumstances. The evidence established that considering the plaintiffs' financial circumstances, and the impending tax sale of the property, the result negotiated by Katzman was the only practical solution available to the plaintiffs to obtain registration of the new mortgage and the funding required to stave off the impending sale.

LAWPRO must sometimes pay out an innocent claimant, then pursue the wrongdoer to get its money back. Such was the case in Doraty v. Dallas Homes¹⁶ A solicitor discharged a mortgage by mistake. An unethical developer took advantage of this mistake to resell the land, to the prejudice of the innocent mortgagee. LPIC paid out the innocent mortgagee, and then proceeded to get a judgment against the unscrupulous developer on the basis of unjust enrichment.

Leading Cases

To help counsel and examiners achieve these results, LPIC management decided in 1995 to appoint a full time Director of Legal Research. As well, management wished to stop paying law firms to research and re-research the same topics over and over again. Part of my job is to track down and organize material and caselaw helpful in defending our insured members. Initially, our material was stashed in plastic bins on shelves in my office. Our only search engine was between my ears. After a while, this arrangement was unsatisfactory. I knew I had put something good aside somewhere, but I could not necessarily find it. Even if I could find it, other people did not have easy access to it.

By then, LPIC hired an information technology department. They helped me set up a database to organize the various cases in which LPIC had been involved. The database also contains references to textbooks, articles, Law Society and Bar presentations, and other papers which are or may be of use. I have references to about two thousand documents in my database at present. The number grows weekly. While there are not enough hours in a day to include all worthwhile material, the system has proven its value on many occasions. For instance, in the Budrewicz case discussed above, the trial judge felt very sorry for the plaintiff. In the middle of the trial, he called counsel into his Chambers, and put heavy pressure on our counsel to settle the action. In response to his telephone call, I was able to furnish counsel with a substantial number of cases on solicitors' duties to non-clients (or lack thereof). We won the case - it was even reported in the Ontario Reports. As can be seen from the footnotes this paper, my system includes cases which were never picked up on Quicklaw. Our material is searchable by keyword and by topic. Our examiners and our counsel have access to it. This paper was written with the aid of the database. While LAWPRO's system cannot hope to do justice to all areas of the law - it is an important "value added" feature for Ontario's real estate bar.

^® Registered trademark of Lawyers' Professional Indemnity Company.

¹ [2000] S.C.J. 37
² (1996), 1 R.P.R. (3d) 245 (Ont.Ct.Gen.Div.)
³ (1999), 22 R.P.R. (3d) 159 (Ont.S.C.J.)
⁴ (1999) 26 R.P.R. (3d) 262 (Ont.C.A.)
⁵ [1999] O.J. No. 2008 (Ont.S.C.J.)
⁶ [2001] O.J. No. 57 (C.A.)
⁷ (1999) 20 R.P.R. (3d) 320 (Ont.S.C.J.)
⁸ (2000) 48 O.R. (3d) 313 (Ont.C.A.)
⁹ (1999) 41 O.R. (3d) 78 (Ont.Ct.Gen.Div.)
¹⁰ [2001] O.J. No. 2216 (Ont.S.C.J.)
¹¹ Unreported endorsement by Gans, J., Court File No. 01-CV-214627CM, November 5, 2001
¹² [2001] O.J. No. 2125 (Ont.S.C.J.)
¹³ Court File No. 02-CV-227470 CM3
¹⁴ Unreported decision by Jean C.H. Iu, Deputy Director of Titles, released February 22, 2002
¹⁵ [2002] O.J. No. 2369 (Ont.S.C.J.)
¹⁶ Unreported judgment of Charbonneau, J. (Ont.S.C.J.) released June 21, 2001, Court file 98-CV-7638 (Ottawa)

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