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Partnership Severed Joint Tenancy

In Garland v Newhouse 2021 BCSC1291 a partnership between non-spouses of a jointly owned property was held to sever the joint tenancy when one of the partners died.

The parties had no personal relationship and equally contributed to the purchase of the investment property, equally shared expenses associated with the property and equally shared in profits derived. Their objective was to earn profit over time. They opened the joint bank account to manage the financial aspects of the business. The accounting records describe the arrangement as a partnership and individuals as partners, and the court found that there was in fact a partnership and that it was inconsistent with a joint tenancy with right of survivorship.

 

The court stated that it might have been a different result if the partners were spouses.

What Is a Partnership

Partnership is defined in s. 2 of the Partnership Act as “the relation that subsists between persons carrying on business in common with a view of profit”. The conditions for the formation of a partnership are set out by the Court of Appeal in Grewal v. Grewal, 2016 BCCA 237:

[107] …A partnership must have a contractual foundation, demonstrated by an offer and acceptance regarding all essential terms, certainty of terms, consideration, and an intention to create legal relations. The contract may, however, be oral or written, and may be established by express declaration or be implied through conduct: Porter v. Armstrong, [1926] S.C.R. 328 at 329; Prince Albert Co-operative Association v. Rybka, 2010 SKCA 144 at paras. 23-24. Whether a partnership exists must be determined pragmatically and objectively, in the context of all of the surrounding circumstances: Backman v. Canada, 2001 SCC 10 at paras. 25-26. As stated by the Court in Backman:

25. … In other words, to ascertain the existence of a partnership the courts must inquire into whether the objective, documentary evidence and the surrounding facts, including what the parties actually did, are consistent with a subjective intention to carry on business in common with a view to profit.

A partnership may be distinguished from certain other relationships, including co-ownership of land when the parties have no intention of creating a partnership. Section 4(a) of the Partnership Act expressly provides that the co-ownership of land does not of itself create a partnership as to any property that is so held, whether or not the co-owners share profit from use of the property. Whether or not the position of co-owners becomes that of partners depends on their intention, as disclosed by all of the facts of the case. It is necessary to determine whether the parties had a common intention to carry on business in a partnership, or whether they intended to maintain their separate interests in the property as co-owners: A.E. LePage Ltd. v. Kamex Developments Ltd. et al (1977), 16 O.R. (2d) 193 (C.A.) at 195.

The co-ownership of land by spouses presents a distinct category of cases. Courts are less ready to infer a partnership from the conduct of the parties where the parties are spouses. This is because such conduct may be equally consistent with conduct arising out of the community of interest created by the marriage: Diflorio v. Canada, 2014 TCC 67 at paras. 33–40, rev’d only on costs 2015 FCA 11; Bains v. Canada, 2005 FCA 378.

 

Joint Tenancy Severed

In its ordinary operation, the principal characteristic of joint tenancy is the right of survivorship. When a joint tenant dies, their interest is extinguished, and the surviving joint tenant takes full ownership of the property: McKendry v. McKendry, 2017 BCCA 48 at para. 28.

[ However, where the property in issue is partnership property, there is a presumption that there is no right survivorship as between partners, at least as concerns their beneficial interest in partnership assets: R.C. I’Anson Banks, Lindley & Banks on Partnership, 20th ed. (London: Sweet & Maxwell, 2017) at 19-13 [Lindley & Banks]. Absent compelling evidence of a contrary agreement, a surviving partner holds legal title to property held in joint tenancy on trust for the surviving partner and the estate of the deceased partner: Agro Estate v. CIBC Trust Corp. (1999), 26 E.T.R. (2d) 314 at para. 44 [Agro]. This presumption is reflected in the rules governing partnership property under the Partnership Act. Section 23 provides, in relevant terms, as follows:

23 (1) Subject to subsection (2), all partnership property must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement.
(2) The legal estate or interest in land that belongs to the partnership devolves according to its nature and tenure and the general rules of law applicable to it, but in trust so far as necessary, for the persons beneficially interested in the land under this section.

When partnership property is held in joint tenancy, the effect of s. 23(2) is that the legal estate transfers to the surviving partner, but the property must be held in trust for the benefit of the deceased partner and the surviving partner. Both are “beneficially interested in the land”: Agro at para. 38. The devolution of legal estate on the death of a partner is explained in Lindley & Banks at 18-66.
Devolution of the legal estate in land will in all cases be governed by the normal law affecting real property; thus, on the death of a partner, any land vested in him and his co-partners will devolve on the latter in their capacity as surviving trustees of a trust of land. Those partners will accordingly be entitled to charge or sell the land for the purpose of paying partnership debts or otherwise winding up its affairs. As regards the beneficial entitlement of the deceased partner in respect of land (if any), the surviving partners on whom the legal estate devolves are naturally bound to account to his estate therefor.

The death of a partner in a two-person partnership dissolves the partnership: Partnership Act, s. 36(1)(a). On dissolution, every partner is entitled, pursuant to s. 42, to a proportionate share of the partnership assets after the payment of debts. Section 25 of the Partnership Act provides that where land becomes partnership property, it is to be treated as between the partners, including the representative of a deceased partner and their heirs and executors, as personal or movable and not real or heritable estate.

Underlying these provisions is the equitable principle of partnership law that all property, whether real or personal, is subject to sale on the dissolution of the partnership, with each partner, or representative of a deceased partner, having a right to insist on a sale. A partner’s share in a partnership consists of their proportion of the partnership assets after they have been turned into money and applied in liquidation of partnership debts. As between the partners, land owned by a partnership is deemed to have already converted into personal estate and it devolves as such: E.R. Hardy Ivamy and D.R. Jones, Underhill’s Principles of the Law of Partnership, 12th ed. (London: Butterworth’s, 1986) at 34; Lindley & Banks at 19-14.

A right of survivorship is inconsistent with the ordinary rules that govern the treatment of partnership assets on the dissolution of a partnership. This is not to say that the right of survivorship can never apply to partnership property. However, there must be evidence of a contrary agreement between the parties that is sufficiently clear and compelling to overcome the presumption that beneficial interest in partnership property does not transfer through the right of survivorship.

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