LAW REFORM COMMISSION OF BRITISH COLUMBIA FIXTURES

LAW REFORM COMMISSION

OF BRITISH CO L UMB IA

FIXTURES AND THE

PERSO NAL PROPERTY

SECURITY ACT

(INTERIM REPORT)

LRC 130 January, 1993

The Law Reform Commission of British Columbia was established

by the Law Reform Commission Act in 1969 and began functioning in 1970.

The Commissioners are:

ARTHUR L. CLOSE, Q.C., Chairman

LYMAN R. ROBINSON, Q.C.

PETER T. BURNS, Q.C.

THOMAS G. ANDERSON

Gregory G. Blue and Elizabeth S. Liu are Legal Research Officers to

the Commission.

Sharon St. Michael is Secretary to the Commission.

Linda Grant provides text processing and technical copy preparation.

The Commission offices are located at Suite 601, Chancery Place,

865 Hornby Street, Vancouver, B.C. V6Z 2G3.

____________________________________

The Law Reform Commission gratefully acknowledges

the financial support of the Law Foundation of British

Co lum bia in c arrying o ut this proje c t.

____________________________________

Canadian Cataloguing in Publication Data

Law Reform Commission of British Columbia.

Fixtures and the Personal Property Security Act

(interim report)

(LRC, ISSN 0843-6053 ; 130)

Includes bibliographical references: p.

ISBN 0-7718-9345-0

1. Security (Law) - British Columbia. 2. Personal property -

British Columbia. 3. British Columbia. Personal Property Security

Act. I. Title. II. Series: Law Reform Commission of British

Columbia. LRC ; 130.

KEB271.A72L38 1993 346.711'074 C93-092066-X

KF1050.L38 1993

TO THE H ONOURABLE COLIN GABELMANN

ATTORNEY GENERAL OF THE PROVINCE OF BRITISH COL UMBIA:

The Law Reform Commission of British Columbia has the

honour to present the following:

REPORT ON

FIXTURES AND THE

PERSONAL PROPERTY SECURITY ACT

This is an Interim Report which brings forward recom-

mendations on a particular portion of a larger project referred to the

Law Reform Commission early in 1992. The reference was broadly

directed at the interface between the Personal Property Security Act and real

property law, but it also identified the treatment of fixtures under the

Personal Property Security Act as a matter which called for particular

attention. This aspect of the reference has been given priority.

Apart from two issues which the Commission has identified

as requiring further study, the conclusion in this Report is that the

general approach to fixtures taken by the Personal Property Security Act is

satisfactory and the focus of any law reform measures should be to

clarify the operation of the Act where that appears to be necessary.

Recommendations are made accordingly.

Arthur L. Close, Q.C.

January 14, 1993 Chairman

Table of Contents

I BACKGROUND. .......................................... 1

A. Fixtures Generally. ..................................... 1

B. Concerns in Relation to Fixtures. . . . . . . . . . . . . . . . . . . . . . . . . . . 3

C. This Report............................................. 4

II REFORM. ................................................ 6

A. Definition Issues. ...................................... 6

1. The Problem........................................ 6

2. Finding a Solution. .................................. 8

(a) Scope of the Problem............................. 8

(b) Wider use of the “personal property,

fixtures and crops” Formulation. . . . . . . . . . . . . . . . . . . 1 0

“personal property”. ............................ 1 0

(d) Define “personal property” for the

Purposes of Particular Sections.. . . . . . . . . . . . . . . . . . . 1 1

3. Crops and Other Interests............................ 1 2

4. Recommendations. ................................. 1 2

B. Section 36(3): “person with an interest in the land”. . . . . . . . . . 1 4

C. Fraud and Notice...................................... 1 5

D. Conclusion and Summary of Recommendations.. . . . . . . . . . . . 1 9

E. Acknowledgements. ................................... 2 3

APPENDIX A: PERSONAL PROPERTY SECURITY ACT........ 2 5

APPENDIX B: TERMS OF REFERENCE. . . . . . . . . . . . . . . . . . . . . . 4 2

APPENDIX C: THE OPERATION OF SECTION 36.. . . . . . . . . . . . 4 3

A. Background to Section 36............................... 4 3

B. The Policies of Section 36............................... 4 3

C. The Functioning of Section 36. . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4

D. Other Limits on Fixture Financing.. . . . . . . . . . . . . . . . . . . . . . . 4 6

APPENDIX D: WHAT IS A FIXTURE?. . . . . . . . . . . . . . . . . . . . . . . . 4 8

A. At Common Law...................................... 4 8

B. Under the PPSA....................................... 5 0

APPENDIX E: TWO OUTSTANDING ISSUES. . . . . . . . . . . . . . . . . 5 2

A. Priority to Fixtures Under a General

Security Agreement.................................... 5 2

B. Narrowing the Concept of “fixture”. . . . . . . . . . . . . . . . . . . . . . . 5 3

1. S.B.C. 1989, c. 36. Selected provisions of the Act are set out in Appendix A to this Report.

2. R.S.B.C. 1979, c. 219.

3. The full terms of reference are set out as Appendix B to this Report.

4. Ibid. para. 4.

5. R.S.B.C. 1979, c. 370.

6. “Affixation” is a term usually employed to describe the connection or attachment of the item to the land.

CHAPTER I BACKGROUND

A. Fixtures Generally

Early in 1992 the Attorney General requested the Law

Reform Commission to examine the “relationship between the

Personal Property Security Act and the Land Title Act in their application to

property that may have characteristics both of land and of personal

property.” An example of property which displays both characteris-

tics is the “fixture” and the terms of reference for this study re-

quested that particular attention be given to certain issues that arise

in relation to fixtures.

A simple example illustrates the basic idea of the fixture and

some of the issues it raises. A newly manufactured item of tangible

property, such as a furnace, is indisputably personal property. When

it is sold by the manufacturer to a furnace dealer, the transaction is

governed by the Sale of Goods Act. It has none of the characteristics of

land.

Later, however, the furnace will be installed in a building. At

the time the furnace becomes “affixed” its legal character changes.

In law the furnace loses it identity as an item of personal property.

It becomes part of the “land” to which it is attached. Still later, the

furnace may become worn out and require replacement. When it is

detached from the land for sale to a scrap dealer it may again assume

the character of personal property.

These rules operate simply and fairly so long as there are no

competing interests in either the land or the furnace which must be

accommodated. But matters are not always that simple. The owner

may mortgage the land to a lender. This may occur either before or

after the furnace is installed. The owner may also create a separate

security interest in the furnace in favour of a second lender. Again,

this might occur either before or after the furnace is installed. How

is a competition over the furnace between these two secured lenders

to be resolved?

CHAPTER I: BACKGROUND

7. S. 49.

The “classic” rules of real property mandate an answer which

invariably favours the lender who took the mortgage on the land.

Once the furnace becomes part of the land, any existing security in

it vanished and no new security interest in the furnace alone could be

created.

The classic position has obvious drawbacks. The owner of

the land cannot use the fixtures as collateral in a separate financing

transaction - even if that transaction is the one that allows the land

owner to acquire the fixture in the first place. It may also deprive the

owner of a valuable source of collateral that would support an

extension of credit for other purposes. This suggests the need for a

scheme which modifies the classic position in a way which permits

the land owner to use fixtures as a separate asset base for the purpose

of obtaining financing.

An innovation of this kind would result in a legal position

where particular items of property are treated as land, in some

circumstances and for some purposes, and as personal property in

other circumstances and for other purposes. “Land” and “personal

property” are both legal concepts which carry their own body of

rules. These rules may collide when interests come into competition.

This raises the need for a set of meta-rules to define the result when

there is a clash between the systems of primary rules. A properly

functioning set of meta-rules would permit fixture-based financing

while, at the same time, recognize the legitimate expectations of

persons whose interests in fixtures are based on an interest in the

land itself. Section 36 of the Personal Property Security Act (PPSA)

purports to provide such a set of meta-rules.

Briefly stated, section 36 modifies the common law rule that

goods which become attached to land become part of that land. This

allows a security interest in the goods to exist independently of an

interest in the land. The PPSA provides machinery which permits

the holder of such a security interest to register a notice of it on the

title to the land. The fact and timing of that registration may affect

the secured party's priority in any competition with a person whose

interest in the goods is based on an interest in the land itself. The

full text of section 36 is set out in Appendix A to this Report and a

more detailed explanation of its operation and the priority rules it

establishes is to be found in Appendix C.

B. Concerns in Relation to Fixtures

CHAPTER I: BACKGROUND

8. This does not appear to be the experience of other Canadian PPSA jurisdictions where the fixture

provisions have not given rise to similar concerns.

9. Virtually all of the latter concerns are apprehended rather than actual, and are based on conjecture about

what might happen rather than actual cases that have led to undesirable results.

10. Two alternative groups of proposals were put forward in the Report. The first group envisaged

comprehensive changes based on the 1972 revisions to the corresponding provisions of Article 9 of the

Uniform Commercial Code. The second group of proposals described a series of ad hoc amendments to

section 36 intended to clarify its operation without altering it in any fundamental way.

11. Reaction to the first group of MacDougall proposals, ibid., was generally negative.

12. A body has come into being to act as a clearing house for work on, and refinem ents to, the Model Act -

the Canadian Conference on Personal Property Security Law.

The provisions of the Personal Property Security Act in relation to

fixtures have given rise to a certain amount of controversy in this

province. These concerns emanate almost entirely from lawyers in

the province engaged in business law and real property transactions.

Some of the concerns were clearly based on disagreements with the

policy of the PPSA in relation to fixtures. The concerns of others

focused more on drafting and what is perceived to be the uncertainty

of outcome in particular circumstances. These concerns, initially put

to government officials, led to the reference of this topic to the Law

Reform Commission.

To assist us in this reference the Commission engaged a

consultant, Professor Bruce MacDougall, of the Faculty of Law,

University of British Columbia. At our request, Professor

MacDougall spent a good deal of time consulting with members of

the commercial and real property bar to identify their concerns with

greater precision. Professor MacDougall was also asked to identify

and bring forward a range of possible modifications to the PPSA that

respond to the concerns.

In May 1992 Professor MacDougall submitted to us a report

which embodied the results of his consultation and some possibilities

for reform. The MacDougall Report was reproduced and circulated

among key practitioners and legal academics with an invitation to

comment.

C. This Report

The recommendations made in this Report have been largely

shaped by the consultation process described. An important

consideration, however, has been to maintain uniformity with

comparable legislation in other provinces. The British Columbia

PPSA is virtually identical to that in force in Alberta and this version

is what is sometimes referred to as the “Western Canadian Model

PPSA.” It is under active consideration for adoption in Saskatche-

wan, Manitoba, the Northwest Territories and New Brunswick.

CHAPTER I: BACKGROUND

13. See Appendix E.

Uniformity in commercial law matters is not easily achieved and once

achieved should not be lightly abandoned.

Our general conclusion is that the state of the PPSA, so far

as it concerns fixtures, is generally satisfactory. Section 36, in

particular, achieves a careful balancing of interests. With two

possible exceptions, we do not believe any major changes in theory,

structure or approach to the treatment of fixtures in the PPSA is

called for.

This does not mean, however, that the PPSA has reached a

state of near-perfection as some of its defenders seem to suggest. In

particular, achieving a proper structure of definitions and legislative

statements concerning the application of the PPSA to fixtures has

not been free of difficulty. Our principal recommendations in this

Report, therefore, focus on ways of achieving a smoother integration

of fixtures into the overall structure of the Act and addressing some

perceived drafting ambiguities that have led to serious concerns.

These recommendations emerge in the following chapter.

There are two issues which we have identified as appropriate

for “further study.” These issues are described in Appendix E. To

have pursued both or either of these with a view to formulating a

final position would have significantly delayed the production of this

Report. Submissions in relation to these issues would be welcome.

It should be stressed also that this Report covers only one

aspect of a larger project. The importance placed on the fixtures

issue by the bar and the prominence given to it in the terms of

reference from the Attorney General led us to proceed on it as a

matter of priority. This is an interim report.

1. A “licence” is a statutory permit to harvest timber on Crown land. Analytically it may be a mere

“personal right” rather than property.

2. Why the drafter omitted licences from this recitation is not clear.

3. See e.g. section 18(6).

4. S. 12 provides that a security interest attaches when “the debtor has rights in the collateral” and

“collateral” is defined only with reference to personal property, which does not include fixtures.

5. B.C. Reg. 67/91 Reg. 1(4). S. 76(1)(l) of the PPSA allows the making of a regulation “defining a word

or expression used in this Act.” The absence of any definition of personal property in the PPSA itself left

government free to provide such a definition by regulation. The comparable legislation of

both Alberta and Ontario does contain a definition of “personal property” which either directly or indirectly

embraces fixtures. The Ontario Personal Property Security Act, R.S.O. 1990, c. P-10, s. 1 does this directly by

mentioning fixtures as one element in a list of enumerated types of property that constitute “personal

property.” The Alberta Personal Property Security Act, S.A. 1988, c. P-4.05, s. 1, achieves this indirectly. Its

definition of “personal property” includes a reference to “goods” which in turn (like the British Columbia

PPSA) is defined to include fixtures.

CHAPTER II REFORM

A. Definition Issues

1. THE PROBLEM

The Personal Property Security Act applies to more than personal

property. It applies to fixtures and growing crops which are interests

in land. It also applies to a licence (essentially a right to harvest

timber) which, if it is property at all, is probably also an interest in

land. The Personal Property Security Act contains an elaborate structure of

definitions some of which use the expression “personal property” (a

term that is not defined in the PPSA itself) as a unit of reckoning. In

some cases, the drafter of the PPSA has had regard to the limitations

of the concept of “personal property” and linked that term with

other kinds of property embraced by the Act. Paragraph (a) of the

definition of “proceeds” therefore speaks of “personal property,

fixtures and crops.” In other places, however, the drafter has used

“personal property” in contexts which suggest that it was meant to

include fixtures and crops.

A critical omission of this kind is to be found in the definition

of collateral in section 1:

“collateral” means personal property that is subject to a security interest;

This definition, when read into section 12 of the Act, raises the

possibility that a security interest can never attach to a fixture

because a fixture is not personal property.

An attempt was made to repair this omission in a 1991

amendment to the PPSA Regulations which set out the following

definition:

CHAPTER II: REFORM

6. B.C. Reg. 215/91.

7. See n. 5, supra.

“personal property”, in the Personal Property Security Act and in this Regulation

includes fixtures and crops.

Many practitioners regarded this as an unsatisfactory solution. In

particular, it led to fears that every mortgage of real property which

also extended to fixtures would have to be the subject of a separate

filing under the PPSA as to the fixtures (with perhaps a further filing

in the Land Title Office) in order to fully protect the interest. The

response was a further regulation much more complicated than its

predecessor which in its attempt to clarify matters, in the view of

many, only appears to obscure the position more thoroughly:

1. (4) Except as otherwise provided in subsection (4.1) and notwithstanding

that the fixture or crop remains part of the land to which it is affixed or

attached and that a dealing with land is a dealing with the fixtures and crops

affixed or attached to the land, “personal property” in the Personal Property

Security Act and this regulation is conclusively deemed to include a fixture or

crop for all purposes related to a security interest in the fixture or crop

including, without limitation, the validity, attachment, perfection, priority,

subordination, enforceability or realization of, or other dealing with, that

security interest.

1. (4.1) Subsection (4) does not apply

(a) for any purpose other than a purpose of the Personal

Property Security Act and this regulation,

(b) to an interest which is created by words that also create

or transfer an interest in the land to which the fixture or

crop is affixed or attached, or

granting of a lease of the land to which the fixture or

crop is affixed or attached.

1. (4.2) For the purpose of interpreting subsection (4.1)(b) words that create

an interest in a fixture or crop are not “words that also create or transfer an

interest in the land to which the fixture or crop is affixed or attached” solely

because the words creating the interest in the fixture or crop are contained

in a document which also contains other words that create or transfer an

interest in the land.

We set out this regulation in full, not with the expectation that the

reader will understand it, but merely to illustrate the morass into

which the drafter has been led on this question.

In British Columbia, the complicated regulation might be

repealed and replaced by definitional changes modeled on the

Alberta or Ontario legislation. That alone, however, would give rise

to the same set of concerns which greeted the first version of the

regulation -- that it swept more into the PPSA than was intended. A

CHAPTER II: REFORM

8. The definition of “intangible” also contains a reference to personal property, in the compendious sense,

but the expression is linked with “goods” which is defined to include fixtures. The structure of the definition

(so far as fixtures are concerned) operates to exclude from “personal property” something that was never

included in it, so no problem is created.

change of this kind in the definitions would have to be matched by

a provision which somehow makes it clear that the Act has no

application to an interest in fixtures which arises purely as a result of

a dealing with an interest in land. The net effect of embracing this

approach would be to transfer the solution embodied in the regula-

tion into the Act itself with the hope, but no guarantee, that the

drafting could be improved.

2. FINDING A SOLUTION

(a) Scope of the Problem

The search for alternatives led us to examine the various

contexts in which the expression “personal property” is actually used

in the PPSA. This was done through a computer assisted search of

the text of the Act and amending legislation. Interestingly, the

expression does not occur that frequently and the possibility that the

Act in using “personal property” might have inadvertently excluded

fixtures from the application of a particular provision is less serious

than it might first appear. Moreover, in some of the most important

cases the drafter has expressly addressed the status of fixtures as the

definitions of both “goods” and “proceeds” illustrates:

“goods” means tangible personal property, fixtures, crops and...

“proceeds” means

(a) identifiable or traceable personal property, fixtures and crops...

This leaves only a handful of provisions in which the drafter appears

to have used “personal property” as a convenient compendious

expression for all property regulated by the PPSA. They are:

Section 1 - “collateral”: As noted above, this term is

defined to mean “personal property” that is subject to

a security agreement.

Section 10: In section 10 “personal property” is used

to stipulate the contents of a statement which must

appear in the security agreement if the agreement is to

meet the writing requirements that will make it ef-

fective against third parties.

CHAPTER II: REFORM

9. As to crops see subheading 3, infra.

Section 18: Section 18 permits various persons to

obtain information and particulars concerning a

security agreement from the secured parties. These

include “a person with an interest in personal prop-

erty of the debtor.” The expression “personal prop-

erty” also appears in the context of provisions that

are concerned with identifying the property that is

collateral under a particular security agreement.

Section 55: Section 55 describes the application of Part

5 of the PPSA which is concerned with rights and

remedies on default. Subsections (4), (5), (5.1) and (6)

are aimed at simplifying enforcement where the same

obligation is secured by both an interest in land and

a security interest to which the PPSA applies. In

these provisions “personal property” is used in

contradistinction to the land.

Identifying precisely how the term “personal property” is used in the

Act allows us to examine several possible solutions more closely.

(b) Wider use of the “personal property, fixtures and

crops” Formulation

Two definitions (“goods” and “proceeds”) link “personal

property” with fixtures and crops. We believe that this approach

should also be taken with respect to the definition of “collateral.”

The current definition should be replaced by one which refers to

personal property, fixtures and crops.

This strategy, however, does not work well in the other

provisions where the term “personal property” is used repeatedly.

Adopting it on a wider basis would only add further bulk to a piece

of legislation which many regard as “over-drafted” in its current

form. We believe other approaches are preferable.

One or more of these provisions might simply be redrafted

to eliminate the references to “personal property” in favour of other

defined terms in the Act. Section 55, in particular, lends itself to this

CHAPTER II: REFORM

10. Section 55(4) currently provides:

(4) Subject to any other enactment or applicable law to the contrary, where the same obligation is

secured by an interest in land and a security interest to which this Act applies, the secured party may

(a) proceed under this Part as to the personal property, or

(b) proceed as to both the land and the personal property as if the personal property were

land, in which case

(i) the secured party's rights, remedies and duties in respect of the land apply to the per-

sonal property with necessary modifications as if the personal property were land, and

(ii) this Part does not apply.

11. For exam ple, no less than 11 sections of the PPSA contain a subsection which provides that “in this

section `secured party' includes a receiver.” See ss. 17, 36-38, 55-60, 63 and 69.

treatment. In subsection (4) the opening flush might be amended to

refer to “a security interest in collateral to which this Act applies...”

This would permit subsequent references to be to the “collateral”

rather than “personal property.”

Similar drafting solutions may be possible for sections 10 and

18 but they are less obvious. A different solution is available for

these sections.

(d) Define “personal property” for the Purposes of

Particular Sections

The solution we suggest for sections 10 and 18 is to include

in each of them a definition subsection which provides an

“extended” definition of personal property. A subsection which sets

out one or more definitions that apply to that section only is a

common feature of the drafting of the PPSA. Very often, the

content of these special definitions is identical. A subsection might

be added to each of sections 10 and 18 stating that:

(x) In this section “personal property” includes

fixtures and crops.

This would be consistent with the solution the PPSA adopts to

resolve similar problems when they arise.

We believe that a definition that is tightly targeted on two

sections is unlikely to raise the kinds of concerns that the original

definition of personal property in the regulations created. It is clearly

intended to have a very limited and narrow effect.

It should be noted that this approach will require that caution

be exercised by those who may be drafting amendments to the PPSA

in the future. It would likely raise a presumption that when

“personal property” is used in other sections, the common law

CHAPTER II: REFORM

meaning is intended. Every future drafter who uses the expression

will have to consider whether either the common law or the extended

meaning of personal property is intended and, in the latter case,

ensure that the amendment includes an appropriate definition.

CHAPTER II: REFORM

12. E.g., a copy of a security agreement covering a licence may not be the subject of a demand under s.

18(2)(a).

13. The expression “personal property” also appears in the Regulations so the repeal of this definition will

require some further amendment to them. We have not been able to do a computer search on the regulations

to identify the particular provisions that call for attention, but our recommendations concerning the PPSA

itself should provide adequate guidance on dealing with them.

3. CROPS AND OTHER INTERESTS

Regulation 215/91 also covers crops. A legislative solution

to the fixtures problem which results in the repeal of the regulation

will affect how the PPSA applies to crops. Whatever approach is

adopted to ensure that the concept of a PPSA security interest in

fixtures fits comfortably into the conceptual structure of the Act, it

is clear that crops must be given a parallel treatment. The issues are

identical.

If one or more of the recommendations we are making is to

be adopted, it would also be sensible to review the position of

licences. It is doubtful whether a licence is personal property and the

various provisions that use “personal property” in a compendious

way probably do not apply to a licence that is subject to a security

agreement. This may yield anomalous results. Virtually all of the

suggestions we have made respecting the need to clarify the applica-

tion of the PPSA to fixtures are also applicable to licences. More-

over, if licences are to be more fully integrated into the definitions of

the Act some reconsideration of the definition of proceeds is called

for. As the definition currently stands a licence could never be “pro-

ceeds.”

4. RECOMMENDATIONS

Our formal recommendations in this aspect of the fixtures

reference are set out below. They go somewhat beyond the terms we

had originally set for ourselves in that our recommendations, of

necessity, extend to crops and we have provided optional recommen-

dations concerning licences where they raise analogous issues. The

portions of the recommendations that relate to licences have been

square bracketed for convenient reference.

The Commission recommends:

1. Subsections (4), (4.1) and (4.2) of section 1 of the

Personal Property Security Regulation as amended by B.C. Reg.

215/91 be deleted.

CHAPTER II: REFORM

2. In the Personal Property Security Act the definition of “collat-

eral” be deleted and the following substituted:

“collateral” means personal property, fixtures,

[licences,] and crops that are subject to a security

interest;

3. Subsection (4) of section 55 be deleted and a provision

comparable to the following substituted:

(4) Subject to any other enactment or applicable

law to the contrary, where the same obligation is

secured by an interest in land and a security

interest in collateral to which this Act applies, the

secured party may

(a) proceed under this Part as to the collateral,

(b) proceed as to both the land and the collat-

eral as if the collateral were land, in which

case

(i) the secured party's rights, remedies and

duties in respect of the land apply to the

collateral with necessary modifications

as if the collateral were land, and

(ii) this Part does not apply.

4. Subsections (5) and (5.1) of section 55 be amended by

deleting “personal property” wherever it occurs and

substituting “collateral.”

5. The provision comparable to the following be added as

section 10 (1.1) and section 18 (1.1):

(1.1) In this section “personal property” in-

cludes fixtures, [licences] and crops.

B. Section 36(3): “person with an interest in the land”

In addition to the concern addressed by the previous recom-

mendations, one other concern was voiced with such frequency and

urgency by those consulted that we felt it should be addressed in this

Report. This concern revolves around the final words of section

36(3). That subsection states:

CHAPTER II: REFORM

(3) Except as provided in this section or in section 30, a security interest in

goods that attaches before or at the time the goods become fixtures has

priority with respect to the goods over a claim to the goods made by a person

with an interest in the land.

Suppose a lender has both a mortgage (an“interest in the

land”) and an interest recognized under the PPSA. Does section

36(3) prevent the lender from relying on the PPSA interest? There

is no policy reason why section 36(3) should have that effect.

Undoubtedly the drafters of the PPSA intended that section 36(3)

give priority only over that of a “person” whose interest in the goods

arises only because the goods are, in law, part of the land. If that

person also asserts a claim to the fixture based on a separate interest

in the personal property of the debtor, section 36(3) has no applica-

tion even though the person also has an interest in the land. The

competition would be resolved by other priority rules contained in

the PPSA. This is the result that would flow from an interpretation

of section 36(3) that aimed to give effect to its purpose.

A literal reading of this provision, however, could lead to an

interpretation that yields a different result -- so long as a person has

an interest in the land, that person will never be able to get priority

in the goods, as goods, as against a person who does not have an

interest in the land and whose security interest in the goods attached

before or at the time the goods became fixtures. The language of

section 37(3) raises an identical concern with respect to crops.

We believe that sections 36(3) and 37(3) should be revised to

ensure that the “purposive” interpretation prevails. A number of

formulations were suggested by those who raised this concern. The

one which commends itself to us is set out below.

The Commission recommends:

6. The Personal Property Security Act be revised by enacting

amended sections 36((3) and 37(3) similar to the

following:

36. (3) Except as provided in this section or in

section 30, a security interest in goods that

attaches before or at the time the goods be-

come fixtures has priority with respect to the

goods over an interest in the goods arising from an interest

in the land to which they are attached.

CHAPTER II: REFORM

14. (1988) 32 B.C.L.R. (2d) 67 (C.A.)

15. Ibid at 90.

37. (3) Except as provided in this section, a

security interest in crops has priority with

respect to the crops over an interest in the crops arising

from an interest in the land on which they are grown.

[emphasis added]

C. Fraud and Notice

Rarely does the PPSA mention actual knowledge or fraud as

an element which can affect the existence or priority of interests or

rights. Sections 36(4) and 36(5)(b) are exceptions in that they speak

of a person acting “without fraud” and of an interest being “acquired

without fraud.” The reference to these concepts has concerned a

number of practitioners in the real estate bar because, it is argued, it

could lead to the application in the PPSA context of the doctrine of

notice as set out in the controversial case of Lloyds Bank of Canada v.

Lumberton Mills Ltd.

In that case a debenture which prohibited the creation of

prior charges was registered in the office of the Registrar of Compa-

nies. Was it binding on another party who subsequently was given

the right to a general lien on equipment by the same company which

had executed the debenture? The Court of Appeal held that the lien

holder should be taken to have constructive notice of the debenture

and its prohibition.

It was accepted that constructive notice could not exist on

any basis other than registration. Esson J.A. noted that it was a

dangerous doctrine because it is “contrary to the truth,” the gist of

it being that a person who does not know the true facts will be held

to be in the same position as if the facts were known. Esson J.A.

continued:

The question in such cases is, in essence, in what circumstances the failure

to inquire will import notice of the facts which would have been learned had

inquiry been made. Here, the inquiry which could have been made was to

search in the office of the registrar. Had that been done, Coast would have

learned of the prohibitions against creating prior charges. I conclude, on the

basis of the authorities dealing with the equitable doctrine, that Coast must

be held to have had constructive notice of the contents of the debenture.

CHAPTER II: REFORM

16. R.C.B.C. 1979, c. 219 am. S.B.C. 1982, c. 60, s. 7; S.B.C. 1990, c. 11, s. 69.

No statutory provision, it was held, modified the equitable doctrine.

The fear expressed is that a person who has, or intends to

acquire, an interest in the land might be affected not only by a notice

filed under section 49 but also by any actual notice or by constructive

notice the person may be deemed to have by virtue of a financing

statement registered in the personal property registry.

To address this concern sections 29(3) and (4) of the Land

Title Act were enacted. Section 29 provides:

29. (1) Except in the case of fraud in which he has participated, no person

contracting or dealing with or taking or proposing to take from a registered

owner

(a) a transfer of land; or

(b) a charge on land, or a transfer or assignment or subcharge of

the charge,

shall be affected by a notice, express, implied, or constructive, of an

unregistered interest affecting the land or charge other than

(d) a lease or agreement for lease for a period not exceeding 3

years where there is actual occupation under the lease or

agreement; or

(e) the title of a person against which the indefeasible title is void

under section 23(3),

notwithstanding a rule of law or equity to the contrary.

(2) For the purpose of this section 'registered owner' includes a person who

has made an application for registration and becomes a registered owner as

a result of that application.

(3) Subject to section 49 of the Personal Property Security Act, no person

contracting or dealing with, taking from or proposing to take from a

registered owner, an estate or interest in land, or a transfer or assignment of

an estate or interest in land, is affected by a financing statement registered

under that Act whether or not he had express, constructive or implied notice

or knowledge of the registration.

(4) The fact that the person who is contracting with, dealing with, taking

from or proposing to take from a registered owner under subsection (1) had

knowledge of a financing statement registered under the Personal Property

Security Act, or that the person could have obtained knowledge of the

financing statement by searching the personal property registry established

under that Act, is not evidence of fraud or bad faith for the purposes of

subsection (1).

Those provisions go some way to alleviate the concern about the

Lumberton decision. They deal expressly with the issue of constructive

notice by virtue of registration of a financing statement.

CHAPTER II: REFORM

17. Personal Property Security Amendment Act, 1992, S.B.C. 1992, c. 48, s. 8.

A similar concern underlies section 47 of the PPSA. Until

1992 that provision read as follows:

47. Registration of a financing statement in the registry is not express,

constructive or implied notice or knowledge of its contents to any person.

In 1992 it was amended and now provides:

47. Registration of a financing statement in the registry does not by itself

constitute express, constructive or implied notice to any person of, or

express, constructive or implied knowledge on the part of, any person of

(a) the financing statement or its contents, or

(b) the security interest perfected by the financing statement or the

contents of any security agreement.

The effect of the 1992 amendment is to extend the scope of the

“thing” of which no constructive notice may be taken from the

financing statement to include the underlying security interest and

agreement.

We believe that section 29 of the Land Title Act should be

amended to enlarge its scope in a similar fashion. It would provide

even greater comfort if it included not only a reference to financing

statements but also to security agreements. It is usually in the

security agreements and not in the financing statements that

restrictions and prohibitions will be found.

The Commission recommends:

7. The Land Title Act be amended by replacing subsections

(3) and (4) of section 29 with provisions similar to the

following:

(3) Subject to section 49 of the Personal Property

Security Act, no person contracting or dealing with,

taking from or proposing to take from a regis-

tered owner, an estate or interest in land, or a

transfer or assignment of an estate or interest in

land, is affected by

(a) a financing statement registered un-

der that Act,

(b) the security interest perfected by the

financing statement, or

CHAPTER II: REFORM

whether or not that person had express, con-

structive or implied notice or knowledge of the

registration.

(4) The fact that a person who is contracting

with, dealing with, taking from or proposing to

take from a registered owner under subsection

(1) had knowledge of

(a) a financing statement registered un-

der the Personal Property Security Act, or

(b) the security interest perfected by the

financing statement, or

or that the person could have obtained knowl-

edge of the financing statement or the existence

of the security interest or security agreement by

searching the personal property registry estab-

lished under that Act, is not evidence of fraud or

bad faith for the purposes of subsection (1).

D. Conclusion and Summary of Recommendations

Except for two issues that we believe require further

consideration, it is our conclusion that the PPSA strikes a fair balance

among the needs and legitimate expectations of secured financiers

(whether they rely on land or personal property), owners and others

with interests in land. It is undeniable that the PPSA gives a land

owner the power to create an effective security interest in fixtures in

circumstances where that was not possible before. Some view this

flexibility as a significant erosion of the rights of those whose

interests in fixtures arise under real property law.

It may be true that such a person enjoys a less favourable

position under the new regime, but it cannot be said that a mortgage

lender (land) loses any right to a fixture that had been acquired as a

result of the mortgage. What the new regime does is to prevent that

mortgage lender from automatically getting a prior right to new

fixtures as a debtor acquires them irrespective of the fact that some

other financier may regard them as collateral under a security

agreement.

CHAPTER II: REFORM

18. See n. 12 of Chapter I.

19. See n. 13 supra as to the use of the expression “personal property” in the regulations.

20. The position of licences and the status of our recommendations in relation to them is discussed supra

at p. 12.

It flows from our endorsement of the general theory of

section 36 that any reform measures should be directed toward

insuring that its theory and purpose are carried out most effectively.

A number of potential changes to the PPSA have been suggested to

us. Many of these suggestions have merit although they do not strike

us as requiring urgent or immediate action. We believe the most

sensible course is to draw these to the attention of the Canadian

Conference on Personal Property Security Law for their review.

As discussed in this and the preceding Chapter, two of the

concerns expressed do suggest a need for immediate action and

recommendations are set out below. A minor amendment to the

Land Title Act is also set out.

The Commission recommends that:

1. Subsections (4), (4.1) and (4.2) of section 1 of the

Personal Property Security Regulation as amended by B.C. Reg.

215/91 be deleted.

2. In the Personal Property Security Act the definition of “collat-

eral” be deleted and the following substituted:

“collateral” means personal property, fixtures,

[licences,] and crops that are subject to a secu-

rity interest;

3. Subsection (4) of section 55 be deleted and a provision

comparable to the following substituted:

(4) Subject to any other enactment or applicable

law to the contrary, where the same obligation is

secured by an interest in land and a security

interest in collateral to which this Act applies, the

secured party may

(a) proceed under this Part as to the collateral,

(b) proceed as to both the land and the collat-

eral as if the collateral were land, in which

case

CHAPTER II: REFORM

(i) the secured party's rights, remedies and

duties in respect of the land apply to the

collateral with necessary modifications

as if the collateral were land, and

(ii) this Part does not apply.

4. Subsections (5) and (5.1) of section 55 be amended by

deleting “personal property” where ever it occurs and

substituting “collateral.”

5. The provision comparable to the following be added as

section 10 (1.1) and section 18 (1.1):

(1.1) In this section “personal property” in-

cludes fixtures, [licences] and crops,

6. The Personal Property Security Act be revised by enacting

amended sections 36((3) and 37(3) similar to the

following:

36. (3) Except as provided in this section or in

section 30, a security interest in goods that

attaches before or at the time the goods be-

come fixtures has priority with respect to the

goods over an interest in the goods arising from an interest

in the land to which they are attached.

37. (3) Except as provided in this section, a

security interest in crops has priority with

respect to the crops over an interest in the crops arising

from an interest in the land on which they are grown.

[emphasis added]

7. The Land Title Act be amended by replacing subsections

(3) and (4) of section 29 with provisions similar to the

following:

(3) Subject to section 49 of the Personal Property

Security Act, no person contracting or dealing with,

taking from or proposing to take from a regis-

tered owner, an estate or interest in land, or a

transfer or assignment of an estate or interest in

land, is affected by

CHAPTER II: REFORM

(a) a financing statement registered un-

der that Act,

(b) the security interest perfected by the

financing statement, or

whether or not that person had express, con-

structive or implied notice or knowledge of the

registration.

(4) The fact that a person who is contracting

with, dealing with, taking from or proposing to

take from a registered owner under subsection

(1) had knowledge of

(a) a financing statement registered un-

der the Personal Property Security Act, or

(b) the security interest perfected by the

financing statement, or

or that the person could have obtained knowl-

edge of the financing statement or the existence

of the security interest or security agreement by

searching the personal property registry estab-

lished under that Act, is not evidence of fraud or

bad faith for the purposes of subsection (1).

CHAPTER II: REFORM

E. Acknowledgements

We would like to acknowledge the valuable contribution of

Professor Bruce MacDougall who continues to assist us as a consul-

tant on this project. We stress, however, that the conclusions and

recommendations set out are the Commission's own and are not

necessarily shared by Professor MacDougall. A variety of individuals

have provided response and input. This includes the members of the

Consultative Committee constituted by the Minister of Finance and

Corporate Relations to advise on the Personal Property Security Act and

individual members of the Canadian Conference on Personal

Property Law who took the time to write. Our thanks go to all of

them.

As work on this reference moves forward into its next phase,

we look forward to working with these various bodies and individu-

als in the same spirit of happy cooperation that characterized the

initial phase.

APPENDIX A

PERSONAL PROPERTY SECURITY ACT

S.B.C. 1989, c. 36

(Selected Provisions and Regulations)

1. (1) In this Act

“building” means a structure, erection, mine or works built, constructed or opened

on or in land;

“building materials” means materials that are incorporated into a building and

includes goods attached to a building so that their removal

(a) would necessarily involve the dislocation or destruction of some other

part of the building and cause substantial damage to the building apart

from the loss of value of the building resulting from the removal, or

(b) would result in the weakening of the structure of the building or the

exposure of the building to weather damage or deterioration,

but does not include

(d) machinery installed in a building or on land for use in carrying on an

activity inside the building or on the land;

“collateral” means personal property that is subject to a security interest;

“crops” means crops, whether matured or otherwise, and whether naturally grown

or planted, attached to land by roots or forming parts of trees or plants attached to

land, and includes only trees that

(a) are being grown as nursery stock,

(b) are being grown for uses other than the production of lumber and wood

products, or

reforestation;

“fixture” does not include building materials;

“goods” means tangible personal property, fixtures, crops and the unborn young of

animals, but does not include chattel paper, a document of title, an instrument, a

security, money, trees other than crops until the trees are severed, or minerals or

hydrocarbons until they are extracted;

“intangible” means

(a) personal property, but does not include goods, chattel paper, a document

of title, an instrument, money or a security, and

(b) a licence;

“proceeds” means

(a) identifiable or traceable personal property, fixtures and crops

(i) derived directly or indirectly from any dealing with collateral or the

proceeds of collateral, and

(ii) in which the debtor acquires an interest, ...

“purchase money security interest” means

APPENDIX A: THE PERSONAL PROPERTY SECURITY ACT

(a) a security interest taken in collateral to the extent that it secures payment

of all or part of its purchase price,

(b) a security interest taken in collateral by a person who gives value for the

purpose of enabling the debtor to acquire rights in the collateral, to the

extent that the value is applied to acquire the rights,

...

“security interest” means

(a) an interest in goods, chattel paper, a security, a document of title, an

instrument, money or an intangible that secures payment or performance

of an obligation, but does not include the interest of a seller who has

shipped goods to a buyer under a negotiable bill of lading or its equivalent

to the order of the seller or to the order of an agent of the seller, unless

the parties have otherwise evidenced an intention to create or provide for

a security interest in the goods, and

...

1. (3) A lease under paragraph (b) of the definition of “lease for a term of more than

one year” does not become a lease for a term of more than one year until the lessee's

possession extends for more than one year.

(4) Unless otherwise provided in this Act, the determination whether goods are

consumer goods, inventory or equipment shall be made as of the time the security

interest in the goods attaches.

(5) Proceeds are traceable whether or not there is a fiduciary relationship between the

person who has a security interest in the proceeds, as provided in section 28, and the

person who has rights in or has dealt with the proceeds.

10. (1) Subject to subsection (2), a security interest is only enforceable against a third

party where

(a) the collateral is in the possession of the secured party, or

(b) the debtor has signed a security agreement that contains

(i) a description of the collateral by item or kind, or by reference to one

or more of the following: goods, securities, instruments, documents

of title, chattel paper, intangibles, money, crops or licences,

(ii) a statement that a security interest is taken in all of the debtor's

present and after acquired personal property, or

(iii) a statement that a security interest is taken in all of the debtor's

present and after-acquired personal property except

(A) specified items or kinds of personal property,

(B) one or more of the following: goods, securities, instruments,

documents of title, chattel paper, intangibles, money, crops or

licences.

(2) For the purposes of subsection (1) (a), a secured party is deemed not to have

taken possession of collateral that is in the apparent possession or control of the

debtor or the debtor's agent.

(3) Subject to subsection (6), a description is inadequate for the purposes of

subsection (1) (b) if it describes the collateral as consumer goods or equipment

without further reference to the kind of collateral.

APPENDIX A: THE PERSONAL PROPERTY SECURITY ACT

(4) A description of collateral as inventory is adequate for the purposes of subsection

(1) (b) only while it is held by the debtor as inventory.

(5) A security interest in proceeds is enforceable against a third party whether or not

the security agreement contains a description of the proceeds.

(6) Where personal property is excluded from a description of collateral, the

excluded property may be described as consumer goods without further reference

to the item or kind of property excluded.

12. (1) A security interest, including a security interest in the nature of a floating

charge, attaches when

(a) value is given,

(b) the debtor has rights in the collateral, and

security agreement, the security interest becomes enforceable under

section 10,

unless the parties have specifically agreed to postpone the time for attachment in

which case the security interest will attach at the time specified in the agreement.

18. (1) The debtor, a creditor, a sheriff, a person with an interest in personal property

of the debtor or an authorized representative of any of them may, by a demand in

writing containing an address for reply and delivered to the secured party,

(a) where an address is in the records of the registry,

(i) at the secured party's most recent address in a registered financing

statement that relates to the property, or

(ii) at an address of the secured party, whether or not in the records of

the registry, that is more recent than the address referred to in

subparagraph (i), or

(b) where no address is in the records of the registry, at the current address

of the secured party,

require the secured party to send or make available to the person making the demand

or, if the demand is made by the debtor, to any person at an address specified by the

debtor, any of the information specified in subsection (2).

(2) The information that may be demanded under subsection (1) may be one or more

of the following:

(a) a copy of any security agreement providing for a security interest held by

the secured party in the personal property of the debtor;

(b) a statement in writing of the amount of the indebtedness and of the terms

of payment of that indebtedness as of the date specified in the demand;

attached to the demand indicating which items in the demand are collat-

eral as of the date specified in the demand;

(d) a written approval or correction of the amount of the indebtedness and

of the terms of payment of the indebtedness as of the date specified in the

demand;

(e) sufficient information as to the location of the security agreement or a

copy of it, as specified in the demand, so as to enable a person entitled to

receive a copy of the security agreement to inspect it at that location.

APPENDIX A: THE PERSONAL PROPERTY SECURITY ACT

(3) A person with an interest in personal property of the debtor is entitled to make

a demand under subsection (1) only with respect to a security agreement that

provides for a security interest in the property in which that person has an interest.

(4) A person who is entitled to make a demand under subsection (1) may demand

that the secured party permit the person to inspect a copy of the security agreement

by giving the secured party a written demand to that effect in accordance with

subsection (1).

(5) Where a secured party receives a demand under subsection (4), the secured party

shall permit the person making the demand or his authorized representative to

inspect, during normal business hours, the security agreement at the place specified

by the secured party.

(6) Where a demand is made requiring an approval or correction referred to in

subsection (2) (c) and the secured party claims a security interest in

(a) all of the personal property of the debtor,

(b) all the personal property of the debtor, other than a specified kind or item

of personal property, or

the secured party may indicate this instead of approving or correcting the itemized

list of the personal property.

(7) Where the secured party is a trustee under a trust indenture, he shall reply to a

demand under subsection (1) or (4) within 25 days after he receives it.

(8) Any other secured party shall reply to the demand within 10 days after he receives

it.

(9) Where, without reasonable excuse,

(a) the secured party fails to comply with the demand within the specified

period, or

(b) in the case of a demand under subsection (1) the secured party's reply to

the demand under subsection (1) is incomplete or incorrect,

the person making the demand, may in addition to any other remedy provided for

in this Act, apply to a court for an order requiring the secured party to comply with

the demand.

(10) Where a demand is made under subsection (1) or (4) and the person receiving

the demand no longer has an interest in the obligation or property of the debtor that

is the subject of the demand, he shall, not later than 10 days after receiving the

demand, disclose

(a) the name and address of his immediate successor in interest, and

(b) if known to him, the current successor in interest.

(11) Where, without reasonable excuse, the person receiving the demand fails to

comply with subsection (10), the person making the demand may, in addition to any

other remedy provided for in this Act, apply to a court for an order requiring the

person to whom the demand has been made to comply with this section.

(12) On application under subsection (9) or (11), the court may make an order

requiring the secured party or the person receiving the demand to comply with the

demand or to disclose the information, as the case may be.

APPENDIX A: THE PERSONAL PROPERTY SECURITY ACT

(13) The court may provide for the actual or possible failure of a secured party to

comply with an order under subsection (12) by making one or more of the following

orders either on application or as part of the order under subsection (12):

(a) any order the court considers necessary to ensure compliance with the

demand;

(b) in the case of non-compliance by a secured party or the person receiving

the demand, an order that the security interest of the secured party with

respect to which the demand was made is unperfected or extinguished

and that any related registration be discharged.

(14) On an application

(a) under subsection (11), or

(b) under this subsection made by

(i) the secured party referred to in subsection (9), or

(ii) the person referred to in subsection (10) as receiving the demand,

the court, subject to section 69 (2), may, unless the demand is made by the debtor,

exempt the secured party or person receiving the demand in whole or in part from

complying with subsections (8) to (10) or may extend the time for compliance.

(15) A secured party who has replied to a demand referred to in subsection (1) is

estopped, for the purposes of this Act, against the person making the demand or

against any other person who can reasonably be expected to rely on the reply from

denying

(a) the accuracy of the information referred to in subsection (2) (b) to (d) and

contained in the reply to the demand, and

(b) that the copy of the security agreement referred to in subsection (2) (a)

that is provided in response to a demand under subsection (1) is a true

copy of that security agreement,

but only to the extent that the debtor or the other person has in fact relied on

(d) the accuracy of the copy of the security agreement referred to in

paragraph (b).

(16) A successor in interest referred to in subsection (10) is estopped for the

purposes of this Act, against the person making the demand referred to in subsection

(1) and any other person who can reasonably be expected to rely on the reply to the

demand, from denying

(a) the accuracy of the information referred to in subsection (2) (b) to (d) and

contained in the reply to the demand, and

(b) that the copy of the security agreement referred to in subsection (2) (a)

that is provided in response to a demand under subsection (1) is a true

copy of that security agreement,

but only to the extent that the debtor or the other person has in fact relied on

(d) the accuracy of the copy of the security agreement referred to in

paragraph (b).

(17) A successor in interest is not estopped under subsection (16) where

(a) the debtor or other person who relied on the reply knows that the interest

has been transferred to the successor in interest and knows that person's

identity and address, or

(b) before making the demand, a financing change statement has been

registered under section 45 disclosing the successor in interest as the

secured party.

APPENDIX A: THE PERSONAL PROPERTY SECURITY ACT

(18) The person to whom a demand is made under this section may require payment

in advance of a fee in a prescribed amount for each reply to a demand, but the

debtor is entitled to make a demand and receive a reply to it without charge once

every 6 months.

(19) A secured party who receives a demand that purports to be made by a person

entitled to make it under subsection (1) may act as if the person is, in fact, entitled

to make the demand unless the secured party knows that the person is not entitled

to make it.

20. A security interest

(a) in collateral is subordinate to the interest of

(i) a person who causes the collateral to be seized under legal process

to enforce a judgment including execution, garnishment or attach-

ment, or who has obtained a charging order or equitable execution

affecting or relating to the collateral,

(ii) a sheriff who has seized or has a right to the collateral under the

Creditor Assistance Act,

(iii) a judgment creditor entitled by law to participate in the distribution

of property or its proceeds seized under legal process as provided in

the Creditor Assistance Act, and

(iv) a representative of creditors, but only for the purposes of enforcing

the rights of a person referred to in subparagraph (i),

if that security interest is unperfected at the time

(v) the interest of a person referred to in subparagraph (i), (ii) or (iv)

arises, or

(vi) the judgment creditor referred to in subparagraph (iii) delivers a writ

of execution or certificate to the sheriff under section 3 of the Creditor

Assistance Act,

(b) in collateral is not effective against

(i) a trustee in bankruptcy if the security interest is unperfected at the

date of the bankruptcy, or

(ii) a liquidator appointed under the Winding-up Act (Canada) if the security

interest is unperfected at the date that the winding-up order is made,

and

intangible or goods is subordinate to the interest of a transferee who

(i) acquires an interest under a transaction that is not a security agree-

ment,

(ii) gives value, and

(iii) acquires the interest without knowledge of the security interest and

before the security interest is perfected.

22. (1) a purchase money security interest in

(a) collateral, other than an intangible, that is perfected not later than 15 days

after the date the debtor or a third person at the request of the debtor,

obtains possession of the collateral, whichever is earlier, or

(b) an intangible that is perfected not later than 15 days after the day the

security interest attaches

has priority over the interests of persons referred to in section 20 (a) and (b).

APPENDIX A: THE PERSONAL PROPERTY SECURITY ACT

30. (1) In this section

“buyer of goods” includes a person who obtains vested rights in goods under a

contract to which the person is a party as a consequence of the goods becoming a

fixture or accession to property in which the person has an interest;

“seller” includes a person who supplies goods that become a fixture or accession

under a contract with a buyer of goods or under a contract with a person who is

party to a contract with the buyer;

“the ordinary course of business of the seller” includes the supply of goods in the

ordinary course of business as part of a contract for services and materials.

(2) A buyer or lessee of goods sold or leased in the ordinary course of business of the

seller or lessor takes free of any perfected or unperfected security interest in the

goods given by the seller or lessor or arising under section 28 or 29, whether or not

the buyer or lessee knows of it, unless the buyer or lessee also knows that the sale or

lease constitutes a breach of the security agreement under which the security interest

was created.

(3) A buyer or lessee of goods that are acquired as consumer goods takes free from

a perfected or unperfected security interest in the goods if the buyer or lessee

(a) gave value for the interest acquired, and

(b) bought or leased the goods without knowledge of the security interest.

(4) Subsection (3) does not apply to a security interest in

(a) a fixture, or

(b) goods the purchase price of which exceeds $1 000 or, in the case of a

lease, the market value of which exceeds $1 000.

36. (1) In this section “secured party” includes a receiver.

(2) This section applies to land for which a certificate of title has been issued under

the Land Title Act and to prescribed land or classes of land.

(3) Except as provided in this section and in section 30, a security interest in goods

that attaches before or at the time the goods become fixtures has priority with

respect to the goods over a claim to the goods made by a person with an interest in

the land.

(4) A security interest referred to in subsection (3) is subordinate to the interest of

(a) a person who acquires for value an interest in the land after the goods

become fixtures including an assignee for value of the interest of a person

with an interest in the land at the time the goods become fixtures, and

(b) any person with a registered mortgage on the land who

(i) makes an advance under the mortgage after the goods become

fixtures, but only with respect to the advance, or

(ii) obtains an order for sale or foreclosure after the goods become

fixtures

without fraud and before the notice of the security interest is filed in accordance with

section 49.

(5) A security interest in goods that attaches after the goods become fixtures is

subordinate to the interest of a person who

(a) has an interest in the land at the time the goods become fixtures and who

APPENDIX A: THE PERSONAL PROPERTY SECURITY ACT

(i) has not consented to the security interest,

(ii) has not disclaimed an interest in the goods or fixtures,

(iii) has not entered into an agreement under which a person is entitled

to remove the goods, or

(iv) is not otherwise precluded from preventing the debtor from

removing the goods, or

(b) acquires an interest in the land after the goods become fixtures if the

interest is acquired without fraud and before the notice of the security

interest in the goods is filed in accordance with section 49.

(6) A security interest referred to in subsection (3) or (5) is subordinate to the interest

of a creditor of the debtor who caused to be registered under the Court Order

Enforcement Act a judgment in the appropriate land title office affecting the land,

after the goods become fixtures, and before the notice of the security interest is filed

in accordance with section 49.

(7) The interest of a creditor referred to in subsection (6) does not take priority over

a purchase money security interest in goods a notice of which is filed in accordance

with section 49 not later than 15 days after the goods are affixed to the land.

(8) A secured party who, under this Act, has the right to remove goods from land

shall exercise this right of removal in a manner that causes no greater damage or

injury to the land and to other property situated on it or that puts the occupier of the

land to no greater inconvenience than is necessarily incidental to the removal of the

goods.

(9) A person, other than the debtor, who has an interest in the land at the time the

goods that are subject to the security interest become fixtures is entitled to

reimbursement for any damages to his interest in the land caused during the removal

of the goods, but is not entitled to reimbursement for diminution in the value of the

land caused by the absence of the goods removed or by the necessity of replacement.

(10) The person entitled to reimbursement under subsection (9) may refuse

permission to remove the goods until the secured party has given adequate security

for reimbursement.

(11) The secured party may apply to a court for one or more of the following orders:

(a) determining the person entitled to reimbursement under this section;

(b) determining the amount and kind of security to be provided by the

secured party;

(d) authorizing the removal of the goods without the provision of security for

reimbursement under subsection (10).

(12) A person having an interest in the land that is subordinate to a security interest

under this section may, before the goods have been removed from the land by the

secured party, retain the goods on payment to the secured party of the lesser of the

following:

(a) the amount secured by the security interest having priority over the

interest;

(b) the market value of the goods if the goods were removed from the land.

(13) The secured party who has a right to remove the goods from the land shall give

to each person, who appears by the records of the land title office to have an interest

in the land, a notice of the intention of the secured party to remove the goods and

the notice shall contain

APPENDIX A: THE PERSONAL PROPERTY SECURITY ACT

(a) the name and address of the secured party,

(b) a description of the goods to be removed,

interest,

(d) the market value of the goods,

(e) a description of the land to which the goods are affixed, and

(f) a statement of intention to remove the goods unless the amount referred

to in subsection (12) is paid on or before a specified date that is not less

than 15 days after the notice is given in accordance with subsection (14).

(14) A notice referred to in subsection (13) shall be given at least 15 days before

removal of the goods and may be given in accordance with section 72 or by

registered mail addressed to the address of the person to be notified as it appears in

the records of the land title office.

(15) A person entitled to receive a notice under subsection (14) may apply to a court

for an order postponing removal of the goods from the land.

37. (1) In this section “secured party” includes a receiver.

(2) This section applies to land for which a certificate of title has been issued under

the Land Title Act and to prescribed land or classes of land.

(3) Except as provided in this section, a security interest in crops has priority with

respect to the crops over an interest in the crops claimed by a person with an interest

in the land.

(4) A security interest referred to in subsection (3) is subordinate to the interest of

(a) a person who acquires for value an interest in the land while the crops

are growing crops, including an assignee for value of the interest of a

person with an interest in the land while the crops are growing crops,

and

(b) a person with a registered mortgage on the land who

(i) makes an advance under the mortgage after the crops become

growing crops, but only with respect to the advance, or

(ii) obtains an order for sale or foreclosure after the crops become

growing crops

without fraud and before the notice of the security interest in the growing crops is

filed in accordance with section 49.

(5) A security interest referred to in subsection (3) is subordinate to the interest of

a creditor of the debtor who causes to be registered, in accordance with the Court

Order Enforcement Act, a judgment in the appropriate land title office affecting the

land on which the crops are growing before the notice of the security interest is filed

in accordance with section 49.

(6) The interest of a creditor referred to in subsection (5) does not take priority over

a purchase money security interest in the crops, or a security interest in the crops

referred to in section 34 (8), a notice of which is filed in accordance with section 49

not later than 15 days after the time the security interest in the crops attaches.

(7) Section 36 (8) to (15) applies to seizure and removal of growing crops from land.

APPENDIX A: THE PERSONAL PROPERTY SECURITY ACT

47. Registration of a financing statement in the registry does not by itself constitute

express, constructive or implied notice to any person of, or express, constructive or

implied knowledge on the part of, any person of

(a) the financing statement or its contents, or

(b) the security interest perfected by the financing statement or the contents

of any security agreement.

49. (1) In this section

“fee” means the prescribed fee payable under the Land Title Act for the filing of

notices in the land title office;

“register” has the same meaning as in the Land Title Act;

“registrar” means the registrar of titles for the land title district in which land affected

by a security interest is located;

“secured party” includes an assignee referred to in subsection (6);

“security interest” means a security interest in a fixture under section 36 or growing

crops under section 37.

(2) A secured party may, on application and on payment of the fee, file in the proper

land title office a notice of a security interest signed by the secured party or the

secured party's agent setting out

(a) a description of the land affected by the notice that is sufficient for the

registrar to identify it in his or her records,

(b) the name and address of the debtor and the secured party,

(d) a description of the collateral by which it may be readily identified, and

(e) other prescribed information,

and the registrar shall file the notice and make an entry of it in the register.

(3) The filing of a notice under subsection (2) is notice, from the date and time the

application was received by the registrar, of the security interest, to every person

dealing with the land.

(4) After its expiry date, if any, a notice of a security interest is of no effect and the

registrar

(a) on the application of any person interested in the land and on payment of

the fee, or

(b) on his or her own initiative

may cancel the entry of the notice on the register.

(5) Where a secured party wishes to extend an expiry date specified in a notice filed

under subsection (2), he may, on application and on payment of the fee, file a notice

of extension signed by the secured party setting out

(a) a description of the land affected by the notice that is sufficient for the

registrar to identify it in his or her records,

(b) the extended expiry date,

(d) other prescribed information,

and the registrar shall file the notice and make an entry of it in the register.

APPENDIX A: THE PERSONAL PROPERTY SECURITY ACT

(6) Where a secured party has assigned a security interest in respect of which a notice

has been filed under this section, the assignee may, on application and on payment

of the fee, file a notice of the assignment signed by the assignee setting out

(a) the name and address of the assignee,

(b) a description of the land affected by the notice that is sufficient for the

registrar to identify it in his or her records,

(d) other prescribed information,

and the registrar shall file the notice and make an entry of it in the register.

(7) The registrar,

(a) on receipt of a notice of cancellation signed by the secured party or the

secured party's agent setting out

(i) a description of the land affected by the notice that is sufficient for

the registrar to identify it in his or her records, and

(ii) the filing number of the notice under subsection (2), and

(b) on application and payment of the fee

shall, subject to subsection (8), cancel the entry of the notice filed under subsection

(2) in the register.

(8) Where a notice of cancellation under subsection (7)

(a) is expressed to be a partial cancellation, and

(b) contains a description of the collateral that has been released from the

security interest,

the registrar shall file the notice and make an entry of it in the register.

(9) The registrar is not under any duty to inquire into or verify whether or not the

signature of a person on a notice filed under subsection (7) or (8) is the signature of

the secured party.

(10) Where in respect of a notice registered under this section

(a) all of the obligations under the security agreement to which the notice

relates have been performed,

(b) the secured party has agreed to release part or all of the collateral

described in the notice,

or kind of property that is not collateral under a security agreement

between the secured party and the debtor,

(d) the security agreement to which the notice relates no longer exists

between the secured party and the debtor, or

(e) the item or kind of property described in the notice is not affixed to the

land to which the notice relates,

the debtor named in the notice or any person having a registered interest in the land

may give a written demand in accordance with subsection (12) to the secured party.

(11) A demand referred to in subsection (10) shall require that the secured party, not

later than 40 days after the demand is given, deliver to the person making the

demand a signed notice of amendment, extension or cancellation, whichever the

demand specifies.

(12) The demand referred to in subsection (10) may be given

(a) in accordance with section 72, or

(b) by registered mail to,

(i) where a notice of assignment under subsection (6) has not been filed,

the address of the secured party set out in a notice filed under

subsection (2), or

APPENDIX A: THE PERSONAL PROPERTY SECURITY ACT

(ii) where a notice of assignment under subsection (6) has been filed, the

address of the secured party set out in that notice.

(13) The registrar, on receipt of

(a) a true copy of the demand,

(b) an affidavit of the person who gave the demand verifying that

(i) the demand was given in accordance with subsection (12),

(ii) the copy referred to in paragraph (a) is a true copy,

(iii) the person is not aware of any proceeding of the secured party to

enforce the security interest or to oppose or refute the demand, and

(iv) 40 days have expired since the notice was given under subsection

(12),

(d) the fee,

shall make the appropriate entry in the register to effect the filing or cancellation

requested in the demand unless the registrar has received a court order not to make

the entry.

(14) A secured party shall not charge an expense or accept a fee for compliance with

a demand made under subsection (10) unless the expense or fee has been agreed to

by the parties before the demand was given.

55. (3) In this section “secured party” includes a receiver.

(4) Subject to any other enactment or applicable law to the contrary, where the same

obligation is secured by an interest in land and a security interest to which this Act

applies, the secured party may

(a) proceed under this Part as to the personal property, or

(b) proceed as to both the land and the personal property as if the personal

property were land, in which case

(i) the secured party's rights, remedies and duties in respect of the land

apply to the personal property with necessary modifications as if the

personal property were land, and

(ii) this Part does not apply.

(5) Subsection (4)(b) does not limit the rights of a secured party who has a security

interest in the personal property taken before or after the security interest mentioned

in subsection (4), and the secured party

(a) has standing in proceedings taken in accordance with subsection (4) (b),

and

(b) may apply to the court for conduct of a judicially supervised sale under

subsection (4) (b) and the court may grant the application.

(5.1) For the purposes of distributing the amount received from the sale of land and

personal property where the price paid is not allocated to the land and personal

property separately, the amount of the total price that is attributable to the personal

property is that proportion of the total price that the market value of the personal

property at the time of the sale bears to the market value of the land and personal

property at the time of the sale.

(6) Except as provided in section 67, a security interest does not merge merely

because a secured party has reduced his claim to judgment.

58. (1) In this section “secured party” includes a receiver.

APPENDIX A: THE PERSONAL PROPERTY SECURITY ACT

(2) Subject to subsection (3) and to sections 36 to 38, on default under a security

agreement,

(a) the secured party has unless otherwise agreed the right to take possession

of the collateral or otherwise enforce the security agreement by any

method permitted by law,

...

63. (1) In this section “secured party” includes a receiver.

(2) Subject to subsection (3), on application of a debtor, a creditor of a debtor, a

secured party, a sheriff or a person with an interest in the collateral, a court may

make one or more of the following orders:

(a) an order, including a binding declaration of right and injunctive relief, that

is necessary to ensure compliance with this Part or section 17, 36, 37 or

38;

(b) an order giving directions to a person with respect to the exercise of his

rights or the discharge of his obligations under this Part or section 17, 36,

37 or 38;

Part or section 17, 36, 37 or 38, but only on terms that are just and

reasonable to all parties affected;

(d) an order staying enforcement of rights provided in this Part or section 17,

36, 37 or 38;

(e) an order necessary to ensure protection of the collateral.

(3) Nothing in subsection (2) (c) and (d) affects the application of sections 58 (3) to

(5) and 67.

68. (1) The principles of the common law, equity and the law merchant, except

insofar as they are inconsistent with the provisions of this Act, supplement this Act

and continue to apply.

(2) All rights, duties or obligations arising under a security agreement, this Act or any

other law applicable to security agreements or security interests shall be exercised or

discharged in good faith and in a commercially reasonable manner.

(3) A person does not act in bad faith merely because the person acts with

knowledge of the interest of some other person.

Regulations

1. (4) Except as otherwise provided in subsection (4.1) and notwithstanding that the

fixture or crop remains part of the land to which it is affixed or attached and that a

dealing with land is a dealing with the fixtures and crops affixed or attached to the

land, “personal property” in the Personal Property Security Act and this regulation is

conclusively deemed to include a fixture or crop for all purposes related to a security

interest in the fixture or crop including, without limitation, the validity, attachment,

perfection, priority, subordination, enforceability or realization of, or other dealing

with, that security interest.

1. (4.1) Subsection (4) does not apply

APPENDIX A: THE PERSONAL PROPERTY SECURITY ACT

(a) for any purpose other than a purpose of the Personal Property Security Act and

this regulation,

(b) to an interest which is created by words that also create or transfer an

interest in the land to which the fixture or crop is affixed or attached, or

of the land to which the fixture or crop is affixed or attached.

1. (4.2) For the purpose of interpreting subsection (4.1)(b) words that create an

interest in a fixture or crop are not “words that also create or transfer an interest in

the land to which the fixture or crop is affixed or attached” solely because the words

creating the interest in the fixture or crop are contained in a document which also

contains other words that create or transfer an interest in the land.

141. (1) Where a secured party claims a security interest in goods which are or may

become fixtures or in crops that are growing or to be grown, he shall cause to be

filed in the appropriate land title office a notice in Form 16, setting out

(a) the name and address of the secured party,

(b) the full name and address of the debtor,

be known and distinguished,

(d) the expiry date of the notice or a statement that it is an infinite registra-

tion, and

(e) a description of the land to which the goods are or are to be affixed, or

on which the crops are growing or to be grown, sufficient for the purpose

of identification in the land title office, including a parcel identifier, if

applicable,

and any such notice is to be signed by the secured party or his agent and witnessed.

141. (2) Where a secured party who has filed a notice pursuant to subsection (1)

renews the notice, assigns, discharges or postpones the security interest or releases

part of the collateral from the security interest, the secured party shall cause to be

filed in the land title office where the notice under subsection (1) was filed a notice

in Form 17, setting out

(a) the name of the secured party,

(b) the description of the land given in accordance with subsection (1)(e),

filing and the instrument number assigned to it,

(d) in the case of a notice of renewal, the registration life in multiples of one

year or an infinite number of years,

(e) in the case of postponement,

(i) the full name and address of the person to whom the interest of the

secured party is being postponed, and

(ii) the nature and instrument number of the interest to which the

interest of the secured party is being postponed,

(f) in the case of a notice of partial cancellation releasing collateral from the

security interest, particulars of the collateral deleted from the secured

party's interest,

(g) in the case of a notice of cancellation, a statement to the effect that the

notice mentioned in subsection (1) is wholly cancelled and the security

interest is discharged,

(h) in the case of a notice of cancellation relating to the release of all collateral

on one parcel of land, a description of that parcel of land, and

(i) in the case of a notice of assignment,

(i) a statement to the effect that the notice has been assigned, and

APPENDIX A: THE PERSONAL PROPERTY SECURITY ACT

(ii) the name and address of the person to whom the interest is being

assigned,

and any notice filed pursuant to this subsection must be signed by the secured party

or his agent and witnessed.

APPENDIX B

TERMS OF REFERENCE

(main study)

1. To examine the relationship between the Personal Property Security Act and the Land Title

Act in their application to property that may have characteristics of both land and

personal property. Such property includes fixtures, growing crops and rights to

the payment of money which are secured by or arise out of interests in land.

2. To ascertain whether the two acts operate harmoniously and, in their application

to property referred to in paragraph 1, strike an appropriate balance among

(a) the interests of secured lenders and borrowers who use both registration

systems,

(b) the interests of other persons affected by the legislation,

the registration of security interests in property of all kinds, and

(d) the interest of the public in maintaining the integrity of the land title

system

3. To make recommendations for changes to either or both Acts as may be

necessary to achieve an appropriate balance and bring the Acts into greater

harmony.

4. Without limiting the generality of paragraphs 1 to 3, to consider and make

recommendations on the following issues concerning the taking of security

interests in fixtures:

(a) to what extent and in what circumstances should the law permit the

creation of a security interest in a fixture separate from the land to which

it is affixed?

(b) where the law permits the creation of a separate security interest in a

fixture,

(i) how should this be accommodated by the general law of real

property and provisions of the Land Title Act?, and

(ii) what policies should be adopted in resolving priority competitions

between the holders of security interests in fixtures only and persons

whose interests in a fixture arise because they have an interest in the

land to which it is affixed?

* We have used as our point of departure in the creation of this Appendix a memorandum prepared by

Professor R.C.C. Cuming Q.C. on the treatment of fixtures under the B.C. and Alberta versions of the PPSA.

We are grateful to Professor Cuming for his assistance in this regard. A modified form of the memorandum

has been published as Practice Note 8 in the Personal Property Registry Information Guide Supplementary Materials published

by the Legal Education Society of Alberta.

1. See, Sale of G oods on Condition Act, R.S.B.C. 1979, c. 373.

2. Ibid. ss. 12 and 13.

3. The common law position may also have been modified, although in a less obvious way, by chattel

mortgage legislation. The Chattel Mortgage Act, R.S.B.C. 1979, c. 48, s. 1(1) contemplated a chattel mortgage on

“trade machinery and fixtures and growing crops when separately assigned or charged” in defined

circumstances (definition of “chattels”).

4. In 1972 this section was substantially rewritten to accommodate states that did not have a tradition of

legislative modification of the common law rules of fixtures.

5. S.O. 1967, c. 73.

6. Personal Property Security Act, S.M. 1973, c. 5.

7. Personal Property Security Act, S.S. 1979-80, c. P-6.1.

8. See, Proceedings: Uniform Law Conference of Canada, 1982 at 33 and Appendix X.

APPENDIX C

THE OPERATION OF SECTION 36

A. Background to Section 36

Section 36 of the PPSA operates against a common law background that regards

“fixtures” as real property. The first inroad on the common law position occurred

with the introduction of conditional sales legislation which provided that goods,

other than “building materials,” conditionally sold and affixed to land remained

subject to the rights of the seller as fully as before being affixed if a notice of these

rights was filed in the land title office. This significantly modified the common law

rule. The approach of conditional sales legislation has been extended and more fully

developed by modern personal property security legislation.

The basic structure of section 36 was taken from section 9-313 of the American

Uniform Commercial Code, 1962 Official Text. This version of section 9-313 was

adopted, with modifications, by the 1967 Ontario Personal Property Security Act. Ontario's

adaptation of the section was followed in the Manitoba and Saskatchewan

legislation as well as the Uniform Personal Property Security Act. While section 36 reflects

some drafting changes, its basic structure and the policies that it implements are the

same as found in all of the other Canadian versions of the PPSA.

B. The Policies of Section 36

Section 36 is designed to permit security interests to be retained in goods that

become fixtures and to permit security interests to be taken in goods even though

they are fixtures at the time the security interests attach. It contemplates two quite

distinct situations.

The first, and most common, is where goods are purchased under credit arrange-

ments which provide that the seller or financer has a security interest in the goods.

Section 36 embodies the conclusion that, as a matter of public policy, it is necessary

to recognize that the annexation of the goods does not result in the loss of the

security interest in the goods. Modern commercial practices require that the security

interest in the goods be viewed as continuing in the fixtures as goods with the result

APPENDIX C: THE OPERATION OF SECTION 36

9. In this respect, s. 36 is a much more refined version of the system contained in the Sale of Goods on Condition

Act.

10. It is possible at common law to give a contractual right to a third party exercisable against a mortgagee

of land to remove trade fixtures so long as the right is exercised before the mortgagee acquires a right to

possession of the land through foreclosure proceedings. See, Ellis v. Glover & Hobson Ltd., [1908] 1 K.B. 388 (C.A.

); Credit Foncier v. Lindsay Walker Co., (1919) 48 D.L.R. 143 (Sask. C..A.). In fact, s. 36 permits only a much more

limited erosion of the mortgagee's rights. A security interest in the fixtures is enforceable against a person

who had an interest in the land at the date the security interest attached only if that person expressly or

impliedly consented to the security interest. See, Royal Bank of Canada v. Farm Credit Corporation, (1988) 8 P.P.S.A.C.

206 (Ont. S.C.). Under the common law rule, the third party can exercise the right to remove trade fixtures

without the consent of the mortgagee.

11. The lender will wish to search the PPS Registry to determine whether or not there are prior security

interests in any of the appliances or equipment that are not “fixtures” under the common law. It will also be

necessary to take account of the 15 day grace period for registration of purchase money security interests

provided in s. 22 of the PPSA.

that, in the event of default, the security interest can be enforced against the fixtures

through separation of them from the land and disposal of them as goods.

The second situation contemplated by section 36 is where the security interest

attaches to the fixtures after they have been affixed to the land. While this seems to

be a significant extension of the scheme embodied in conditional sales legislation it

can also be justified. It would be highly artificial to distinguish between recognizing

a security interest in existing fixtures and recognizing that a security interest created

before the goods becomes fixtures continues after the annexation. In both

situations, what is being recognized is the right to have the fixtures removed from

the land and reconverted into goods as a necessary step in the enforcement of the

security interest. Moreover, the concept has precedent in the common law.

There are practical reasons for allowing an owner (or lessee) of land to give an

enforceable security interest in fixtures that person has attached to the land. The

fixtures may be assets of very high value and, as such, important to the owner's

ability to get business financing. The critical requirement is that mortgagees and

others having an interest in the land to which the fixture is attached be fully and

fairly protected. So long as this goal is achieved by section 36, objections based on

form and doctrine should not be given too much weight.

C. The Functioning of Section 36

The functioning of section 36 is best illustrated with an example:

A lender wants to take a mortgage on an existing apartment building that has

installed in it air conditioning equipment and elevators (the “equipment”). It

is part of the arrangement that the lender will have a security interest in all

“fixtures including household appliances in the individual apartments.”

How are the lender's interests to be protected in this transaction? It should be noted

at the outset that some of the appliances intended to form part of the lender's

security will not be fixtures according to the common law “tests.” With respect to

these, the transaction is one purely of a security interest in goods and the lender's

position will be determined with reference to provisions of the PPSA other than

section 36.

With respect to the equipment and those appliances that are “fixtures” the lender

must look to section 36. In what circumstances can the lender claim priority? The

relevant subsections of section 36 provide:

APPENDIX C: THE OPERATION OF SECTION 36

12. S. 36(3).

(3) Except as provided in this section and in section 30, a security interest in goods that attaches before or at

the time the goods become fixtures has priority with respect to the goods over a claim to the goods made by

a person with an interest in the land.

(4) A security interest referred to in subsection (3) is subordinate to the interest of

(a) a person who acquires for value an interest in the land after the goods become fixtures

including an assignee for value of the interest of a person with an interest in the land at the

time the goods become fixtures, and

(b) any person with a registered mortgage on the land who

(i) makes an advance under the mortgage after the goods become fixtures, but only with

respect to the advance, or

(ii) obtains an order for sale or foreclosure after the goods become fixtures

without fraud and before the notice of the security interest is filed in accordance with section 49.

(5) A security interest in goods that attaches after the goods become fixtures is subordinate to the interest of

a person who

(a) has an interest in the land at the time the goods become fixtures and who

(i) has not consented to the security interest,

(ii) has not disclaimed an interest in the goods or fixtures,

(iii) has not entered into an agreement under which a person is entitled to remove the

goods, or

(iv) is not otherwise precluded from preventing the debtor from removing the goods, or

(b) acquires an interest in the land after the goods become fixtures if the interest is acquired

without fraud and before the notice of the security interest in the goods is filed in accord-

ance with section 49.

An existing PPSA security interest in fixtures (if one exists) might have been

taken either before or after the fixtures were annexed to the land. Although each of

these possibilities is addressed by a separate provision, the result in both cases will

turn on whether a filing has been made under section 49 by the holder of a

competing PPSA security interest.

Normal lending practice will call for a search of the land title office to determine

if the debtor owns the land and if there are any prior interests in the land. The

search will also disclose whether any filings have been made under section 49 in

relation to fixtures. If no fixture filings are found, the lender will be able to complete

the transaction and claim priority as to existing fixtures. Section 36(4)(a) will ensure

the lender's priority over any security interest that attached to the fixtures before they

were annexed to the land. Section 36(5)(b) ensures priority over security interests

that attach after annexation.

After the lender registers its mortgage, the debtor may give a security interest in

the fixtures to another person (Secured Party). Even though the Secured Party does

everything required by the PPSA to perfect the security interest, the lender is

protected from the security interest without the need to take any steps whatever.

Under section 36(5), the lender has priority unless it consented to the security

interest.

It is important to note that the lender is protected in the way that has been

described only with respect to goods that were affixed to the land before the lender

took its mortgage. The result may be different if the mortgage is taken first and the

goods are later affixed to the land. If those goods are subject to a security interest,

that interest will defeat the lender. Moreover, that security interest need not be

APPENDIX C: THE OPERATION OF SECTION 36

13. It is som etimes suggested that the security interest should at least be perfected in the Personal Property

Registry in order to have priority over the lender. This suggestion, however, reflects a misunderstanding of

the function of section 36. “Perfection” under other PPSA provisions such as s. 35 regulates priority vis-a-vis

other security interests in the fixtures as goods. S. 36 deals with priority of a security interest in fixtures as

against an interest in the fixtures arising out of an interest in the land to which they are annexed. The section

does not require in any context that a security interest in the fixture be perfected by registration in the

Personal Property Registry in order to have priority over the holder of an interest in land.

14. If, before the goods are affixed, the land owner becomes aware that the provisions of the construction

contract relating to the fixture constitutes a breach of the security agreement under which the security interest

in the fixture arose the land owner's priority will be lost. The protection of section 30(1)-(2) likely extends

to anyone having an interest in the land owner's interest in the land, including a mortgagee of the land. While

a mortgagee is not a “buyer of goods” as defined in section 30(1), it has a derivative interest (i.e. an interest

in the land owner's interest in the land) and, consequently, stands in the shoes of the land owner for priority

purposes.

registered in either the Personal Property Registry or a land title office to obtain that

priority.

D. Other Limits on Fixture Financing

The PPSA contains a special feature designed to ensure that a land owner's

interest in goods annexed to the land under contract with the owner is not

jeopardized by a security interest in the fixture given by a person, other than the land

owner, who annexed the goods to the land. The problem addressed could arise

where the land owner enters into a construction contract that provides for the

installation of fixtures that are to be supplied by the contractor. Any security interest

in the goods to be affixed under the contract held by a supplier or financer of the

contractor is preserved under section 36(3) of the Act without registration or notice

to the land owner. It does not follow, however, that the land owner takes subject to

the security interest.

Sections 30(1) sets out the following definitions:

“seller” includes a person who supplies goods that become a fixture or accession under a contract with a buyer

of goods or under a contract with a person who is party to a contract with the buyer;

“the ordinary course of business of the seller” includes the supply of goods in the ordinary course of business

as part of a contract for services and materials.

These definitions apply to section 30(2):

(2) A buyer or lessee of goods sold or leased in the ordinary course of business of the seller or lessor takes free

of any perfected or unperfected security interest in the goods given by the seller or lessor ..., whether or not

the buyer or lessee knows of it, unless the buyer or lessee also knows that the sale or lease constitutes a breach

of the security agreement under which the security interest was created.

The effect of these provisions is that the land owner is treated as having bought the

goods affixed under the construction contract in the ordinary course of business with

the result that the fixtures are acquired free from any security interest in them given

by the contractor or by a supplier to the contractor.

1. The correctness of the label “fixture” when applied to an item that can be attached or removed has

provoked some discussion. Anger and Honsberger, Law of Real Property (2nd. ed., 1985) 1009 concludes that:

The true rule undoubtedly is that a chattel which has become affixed to the freehold loses its

character of a chattel while it is affixed but, in certain circumstances, may be removed and restored

to its original character of a chattel.

A fixture that is removed for some temporary purpose such as repair retains its character as “land,” even while

removed.

2. The tenant may enter an agreement to the contrary. See Anger and Honsberger, ibid at 1045.

3. As between a landlord and a tenant, trade fixtures are subject to removal: Thom v. Browne, (1960) 26 D.L.R.

(2d) 115 (B.C.S.C.). As between mortgagor and mortgagee, the general common law rule relating to fixtures

is thought to apply: Meux v. Jacobs, (1875) L.R. 7 H.L. 481. Anger and Honsberger, however, suggest that in

the absence of an express stipulation to the contrary, a mortgagor in possession has the right to permit trade

fixtures to be put up and removed from the mortgaged premises, but this right of removal ceases when

possession is taken by the mortgagee; the full effect and application of this principle is a matter of some

doubt: supra n. 1 at 1036. See also Ellis v. Glover & Hobson Ltd., [1908] 1 K.B. (C.A.).

4. Annexation itself can be a fluid concept. Things that are essential to the use of land, although not

annexed to it, may be held to be “constructively annexed” and characterized as fixtures.

5. (1902) 4 O.L.R. 335, 338 (Div. Ct.) per Meredith C.J.

APPENDIX D

WHAT IS A FIXTURE?

A. At Common Law

Goods may become attached or affixed to land so as to become part of the land.

When this occurs the article of goods becomes a “fixture.” The idea of goods

becoming part of the land goes back centuries in the common law and is an instance

of the importance the common law placed on real property. The common law rule

was subject to the qualification that some fixtures could be removed, particularly

those that were not essential for the enjoyment of the land.

With the idea that a fixture could be removed came the concept of “tenant's

fixtures.” These are articles that are attached to leased premises after the term of the

tenancy has begun. They may be detached and removed by the tenant Among

tenant's fixtures that may be removable are trade fixtures. These include all sorts of

items used by a tenant in a business from shelving to boilers to mills.

Whether an article has become a fixture depends upon the degree and mode of

annexation. Stack v. T. Eaton Co. set out five general rules to be applied in determining

whether something had become a fixture:

(1) That articles not otherwise attached to the land than by their own weight are not to be considered as part

of the land, unless the circumstances are such as to shew that they were intended to be part of the land.

(2) That articles affixed to the land even slightly are to be considered part of the land unless the circumstances

are such as to shew that they were intended to continue chattels.

(3) That the circumstances necessary to be shewn to alter the prima facie character of the article are

circumstances which shew the degree of annexation and object of such annexation, which are patent to all to

see.

(4) That the intention of the person affixing the article to the soil is material only in so far as it can be presumed

from the degree and object of the annexation.

(5) That, even in the case of tenant's fixtures put in for the purposes of trade, they form part of the freehold,

with the right, however, to the tenant, as between him and his landlord, to bring them back to the state of

chattels again by severing them from the soil, and that they pass by a conveyance with the land as part of it,

subject to this right of the tenant.

APPENDIX D: WHAT IS A FIXTURE?

6. E.g., La Salle Recreations Ltd. v. Canadian Candex Investments Ltd., (1969) 68 W.W.R. 339 (B.C.C.A.).

7. In fact, the “rules” are not necessarily internally consistent.

8. Hobson v. Gorringe, [1897] 1 Ch. 182, 191 (C.A.) Anger and Honsberger, supra n. 1 at 1017-1019, conclude

from the cases an even stronger view that the intention of the parties is irrelevant.

9. See AMIC Mortgage Investment Corp. v. Investors Group Trust Co., (1985) 40 Alta. L.R. 71 (C.A.).

10. Davy v. Lewis, (1859) 18 U.C.Q.B. 21, 29; Re Maple Leaf Coal Co., [1951] 4 D.L.R. 210 (Alta. S.C., App. Div.).

If a chattel by its very nature is incapable of being affixed, it cannot be made into a fixture by the parties:

Agricultural Development Board v. Ricard, (1927) 32 O.W.N. 140 (H.C.).

11. E.g. furnaces, plumbing items, ceiling lights.

12. E.g. carpets, chairs, shelves.

13. Lyon & Co. v. London City and Midland Bank, [1903] 2 K.B. 135, cf. Berlin Interior Hardware Co. v. Colonial Investment

and Loan Co., (1918) 38 D.L.R. 643 (Sask. S.C.).

14. British Economical Lamp Co. v. Empire, Mile End, Ltd., (1913) 29 T.L.R. 386.

15. Sewell v. Angerstein, (1868) 18 L.T. 300.

The nature of the article and the use of the premises are factors which courts

have also taken into account. A test frequently used is to ask whether the article is

being attached for the better enjoyment of the building or the land as opposed to the

better use of the article as such.

The various “rules” still leave much scope to the intention and purpose of the

parties concerning the annexation. The intention of the parties who affix the goods,

however, is determined with reference to the degree and object of the annexation

and has little to do with their subjective intention. Two parties may agree that an

item is a fixture and while this designation may be binding on them, it will not

necessarily bind a third party.

Although generally the intention of the parties plays little part in determining

whether an article has become a fixture, the parties can, with some restrictions,

determine their respective rights as to the ownership and removability of the

fixtures.

Various factors are taken into account to determine whether at common law

something has become a fixture. These include the nature of the object, the degree

of annexation, what constitutes annexation, the purpose of the premises, what

constitutes better enjoyment of the premises as opposed to the better enjoyment of

the article. Given the number and complexity of these factors, it should surprise no

one that the law in this area is not a model of consistency and clarity. While it can

be said with relative certainty of many things that they are fixtures there will always

be a large grey area.

It is relatively simple to set out tests for identifying fixtures, but the application

of those tests to particular facts can be difficult. Numerous examples are available

to illustrate the eccentric operation of this body of law.

For example, chairs in a theatre which are screwed to the floor have been held to

be attached for their better use and enjoyment as chairs and are therefore were not

fixtures. Why the attachment of the chairs could not be seen as accomplishing a

better use of the building as a theatre was not addressed by the court. Electric

filament lamps have been held to be temporarily fixed only, while “gaseliers” have

been held to be fixtures because they were attached to gas pipes which would have

been useless without them.

Machinery presents particular problems in classifying property as a fixture or

non-fixture. Cases can be found which consider essentially similar circumstances and

APPENDIX D: WHAT IS A FIXTURE?

16. In Liscombe Falls Gold Mining Co. v. Bishop, (1905) 35 S.C.R. 539 a stamp mill was erected for the purpose of

testing ores. Various parts of the mill either rested by their own weight on the soil or were steadied by bolts,

but because the whole installation could be removed without injury to the freehold, it was held to be a chattel.

However, a similar means of attachment in the case of a gas engine did not prevent it from becoming a fixture

in Hobson v. Gorringe, supra n. 8. even though the owner of the engine and its hirer quite clearly intended that it

not become a fixture. In Seeley v. Caldwell, (1908) 18 O.L.R. 472 (H.C.) a number of articles of machinery were

attached to a slight degree to a building, but all were detachable at slight cost and effort and without damage

to the building. Notwithstanding that fact and the clear agreement between the lessor and the lessee that the

machines not become part of the land, they were held to be fixtures. In Parsons v. Hind, (1866) 14 W.R. 860.

it was held that a hydraulic press attached to the floor of a factory by means of brick and mortar remained

a chattel because it was a mere convenience and not essential to the carrying on of the works at the factory.

17. (1985) 58 B.C.L.R. 79 (S.C.).

18. S. 1(1).

19. Ibid.

arrive at quite different results on this issue. A recent British Columbia case

provides an extreme example of how unpredictable this exercise has become. In L

& R Canadian Enterprises Ltd. v. Nuform Industries Ltd. it was held that a self-propelled

forklift truck was “constructively annexed” to the land on which it operated. The

forklift was held to be a fixture and subject to a mortgage of the land being

foreclosed (to the exclusion of the mortgagor and certain chattel mortgagees).

B. Under the PPSA

While the PPSA contains a definition of “fixture” it is of very limited assistance:

“fixture” does not include building materials;

This tells us that some things are not fixtures but does not tell us the things that are

fixtures. Accordingly, whether in any particular situation goods attached to real

property are fixtures, is determined with reference to the common law tests

described above.

Certain types of goods, “building materials”, that are fixtures at common law are

excluded from the operation of section 36. This expression is defined:

“building materials” means materials that are incorporated into a building and includes goods attached to a

building so that their removal

(a) would necessarily involve the dislocation or destruction of some other part of the building and

cause substantial damage to the building apart from the loss of value of the building resulting

from the removal, or

(b) would result in the weakening of the structure of the building or the exposure of the building to

weather damage or deterioration,

but does not include

(d) machinery installed in a building or on land for use in carrying on an activity inside the building

or on the land;

The definition of “building materials” in the Act does not affect what is and what

is not a fixture at common law. While an item, such as machinery installed in a

building, is not “building materials,” it does not follow that it is a fixture, a security

in which is subject to the regime of section 36. If at common law it is not a fixture,

section 36 is irrelevant. On the other hand, an item that falls within the definition

of “building materials” may be a “fixture” at common law, but not under the PPSA.

The common law governs the characterization of any interest taken in the item.

APPENDIX E

TWO OUTSTANDING ISSUES

A. Priority to Fixtures Under a General Security Agreement

When a fixture becomes attached to land that is subject to a mortgage, in the

absence of any competing interest in the fixture, the lender's security is enlarged to

embrace the new value represented by the fixture. One of our correspondents

referred to this as “sweetening” the interest of the mortgage lender. If, however, the

item in question is subject to a security interest that attached before or at the time

it became a fixture, the secured party will have priority over the mortgage lender. In

many cases this is a defensible result. The mortgage lender's financing was not

geared to the acquisition of new fixtures. The secured party, on the other hand, may

have expressly lent money on the security of the fixture or, indeed, financed its

acquisition. In this kind of competition, the priority structure of section 36 achieves

an acceptable result.

But not every secured party who obtains an interest in fixtures will do so by virtue

of a financing that relies on the acquisition of that fixture. The fixture may well have

been swept into a pool of collateral claimed by a financier under a general security

agreement. By this we mean an agreement which claims a security interest in all of

the debtor's present and after acquired personal property. Here the question

whether section 36 achieves the correct result is less clear-cut. Example:

D is a small wholesaler of widgets. D is the registered owner of the premises

out of which the business is operated. The building was acquired with

financing from ML who took a mortgage on the premises. These events

occurred in 1991. In 1992 D sought credit to expand the business inventory.

Funds for this purpose were advanced by SP who took a security interest in

all of D's present and after acquired personal property. In 1993 an aging

freight elevator in the premises ceases to function. D purchases a new

elevator system and causes it to be installed in the premises. In 1994 D

defaults under both the mortgage of the premises and the general security

agreement.

In this example, both ML and SP assert an interest in the new elevator. Neither took

their security on the basis that D would be acquiring a new elevator and whichever

party succeeds in this competition their security will be “sweetened” somewhat.

A person who is uninitiated in the mysteries of section 36 might well think there

is no principled basis for choosing one party over the other. If anything, such an

observer might see the equities slightly in favour of the real property lender, given

the close connection between the elevator and the building itself. The result flowing

from section 36, however, dictates an opposite result. The elevator, when D

acquired it, fell into the description of collateral under SP's security agreement and

that security interest attached no later than the time the elevator became a fixture.

Section 36 mandates a priority for SP.

We believe that this kind of result calls for further examination. Should the PPSA

stipulate that language of a kind usually used in a general security agreement is not

sufficient to create a security interest in a fixture (or at least certain classes of fixture)

essentially, this approach would require an “item or kind” type of description for

fixtures. This issue is one we wish to explore further and preliminary comments on

it would be welcome.

APPENDIX E: TWO OUTSTANDING ISSUES

1. See Appendix A.

B. Narrowing the Concept of “fixture”

The complexity of the common law tests which are applied to determine whether

or not a particular item of property is a fixture are described in Appendix D. Given

the complexity of this exercise it is not surprising that no attempt has been made in

any North American version of the PPSA to define “fixture.” Any attempt to restate

accurately and comprehensively all that is embraced by that concept has been seen

as a hopeless task.

A more limited approach is possible. Without attempting to describe all that is

embraced within the concept of fixture it is possible to identify certain items, kinds

or types of property and state that they are not fixtures. An example of this

approach is to be found in the British Columbia PPSA. The definition section tells

us that:

“fixture” does not include building materials.

The expression “building materials” is, itself, the subject of an elaborate definition.

The effect of this is to leave building materials (which in some circumstances the law

would classify as fixtures) to be governed purely by real property law so far as

security in them is concerned. It might be equally possible to identify certain kinds

or classes of property that, although the common law might regard them as fixtures,

ought to be treated as personal property whether or not they become attached to the

land.

One correspondent who wrote to us suggested that the law should identify a

category of property that might be referred to as “industrial equipment.” The kinds

of items that might be embraced by “industrial equipment” are pulp and paper

making machines, printing presses and the like. The suggestion is that any property

that comes within a definition of industrial equipment should be treated as personal

property, either for the purposes of financing or, perhaps, for all purposes, whether

or not this property was attached in some fashion to the land.

Many items of industrial equipment stand on the hazy boarder between real

property and personal property and the failure of the law to speak clearly as to their

status produces unnecessary litigation. Moreover, where there is even the slightest

possibility that an item of property might be held by a court to be a fixture, the well-

advised secured party will file a notice in the Land Title Office as provided in section

49. This adds expense to the financing transaction, clutters up the land title system

with numbers of filings that are probably unnecessary and heightens the tension

between the users of the respective registration systems.

APPENDIX E: TWO OUTSTANDING ISSUES

2. An early attempt is to be found in the following definitions contained in the (now repealed) Chattel Mortgage

Act, R.S.B.C. 1979, c. 48, s. 1:

“trade machinery” means machinery used at a workshop, except

(a) fixed motive power units such as steam engines, steam boilers and things fixed to

them;

(b) fixed power machinery such as shafts, wheels, drums and things fixed to them, used

to transmit motive power to other machinery, fixed or loose; and

“workshop” means premises where manual labour is performed as a trade or for gain, in or

incidental to the making, alteration, repair, finishing or adaptation for sale of an article or part of it.

Pursuing this suggestion would not be free of difficulty. Simply developing a

definition of “industrial equipment” presents a formidable challenge and transitional

issues would require careful consideration.

Comments on the feasibility of pursuing this suggestion would be particularly

helpful to the Commission.