Kucor Construction & Developments & Associates v. Canada Life Assurance Co. (1998), 41 O.R. (3d) 577 (C.A.)

  • Document:
  • Date: 2018

Kucor Construction & Developments & Associates v. The Canada Life Assurance Company et al.; Gowling Strathy & Henderson et al., Intervenors

[Indexed as: Kucor Construction & Developments & Associates v. Canada Life Assurance Co.]

41 O.R. (3d) 577

[1998] O.J. No. 4733

Docket No. C26783

Court of Appeal for Ontario

Catzman, Austin and Borins JJ.A.

November 13, 1998

 

Mortgages — Restrictions on right to redeem — Prepayment — Statutory right to prepay when mortgage for more than five years — Statutory right to prepay not available to partners of limited partnership where only general partner is corporation — Mortgages Act, R.S.O. 1990, c. M.40, s. 18.

Partnership — Limited partnership — Limited partnership not legal entity capable of owning or mortgaging land — Landholdings of limited partnership to be held or mortgaged in name of general partner or on behalf of all partners — Partnership Act, R.S.O. 1990, c. P.5 — Limited Partnership Act, R.S.O. 1990, c. L.16.

Real property — Partnership property — Limited partnership — Limited partnership not legal entity capable of owning or mortgaging land — Landholdings of limited partnership to be held or mortgaged in name of general partner or on behalf of all partners — Partnership Act, R.S.O. 1990, c. P.5 — Limited Partnership Act, R.S.O. 1990, c. L.16.

In 1976, K Ltd., as general partner, and several corporations and individuals, as limited partners, created a limited partnership known as K Associates for the purpose of creating an investment vehicle to develop an apartment on lands in Cornwall, Ontario. The limited partnership agreement precluded the limited partners from taking part in the management of the limited partnership. Under the limited partnership agreement, the limited partners agreed to guarantee any loans required to purchase the land or finance construction, the guarantee to be limited to the amount of the limited partner’s capital contribution. In March 1976, K Ltd. purported to convey the Cornwall property to K Associates as grantee, and in September 1977, K Associates purported to mortgage the property to MLA Co. Each limited partner signed the mortgage as a guarantor. Subsequently, the maturity date of the mortgage, which had been for a five-year term, was extended to January 1, 1983, and the mortgage was assigned to MT Co. On August 1 , 1987, the mortgage was amended and extended with its term to mature on July 1, 2002. The amended mortgage provided that the mortgage was not open for repayment before maturity. Like the previous agreements, the mortgage extension agreement was executed by K Ltd. on behalf of K Associates, and it was signed by the limited partners in accordance with their individual capital contributions. Subsequently, MT Co. came to be named HK Bank and it administered the mortgage on behalf of the actual investor, CLA Co. In 1996, K Associates brought an application for a declaration that the limited partnership had the right to redeem the mortgage under s. 18(1) of the Mortgages Act, which gives any person “liable to pay or entitled to redeem” a mortgage that is not redeemable until after five years the right to prepay the outstanding balance after five years. Subsection 18(2), however, exempts corporate mortgagors from the right afforded by s-s. (1). On the application, Ground J. interpreted the mortgage as having been entered into by K Ltd. since a limited partnership is not a legal entity capable of owning property and he dismissed the application on the grounds that s-s. 18(2) applied. K Ltd. appealed.

Held, the appeal should be dismissed. The limited partnership’s position was that it was entitled to prepay the mortgage under s. 18(1) of the Mortgages Act and that its right was not precluded by s. 18(2). However, a limited partnership is not a legal entity capable of holding title or of mortgaging land. It is a form of partnership with a number of special characteristics introduced by the Limited Partnership Act. A limited partnership, like an ordinary partnership, is not a legal entity. It carries on business through the general partner. It is through the general partner that a limited partnership acquires and conveys title to real property. Property acquired by a limited partnership should be registered in the name of the general partner. In the immediate case, the mortgage of the land in Cornwall was executed by K Ltd. in its capacity as the general partner of K Associates and the limited partners signed as guarantors, not as a mortgagor. On the facts and the law, the mortgage in the immediate case was given by K Ltd. and since it was a corporation, it was precluded by s. 18(2) from prepaying the mortgage under s. 18(1). Assuming, without deciding, that because the limited partners gave individual guarantees they were persons “liable to pay or entitled to redeem a mortgage”, the essential question remained who gave the mortgage. In this case, it was a corporation and, thus, Ground J. was correct in dismissing the application.

Ground J., however, was incorrect in holding that the conveyance in 1976 was a nullity because a limited partnership is incapable of holding title to land. The purpose of this conveyance was to convey title from K Ltd., which had acquired the property in trust for a limited partnership to be formed, to K Ltd. as the general partner of that limited partnership. Although the form of the conveyance failed in this purpose, taking a functional approach, it had the intended effect, and it was unnecessary to treat the deed as a nullity. The deed should be treated as a conveyance to the general partner.

 

 

Cases referred to

 

872928 Ontario Ltd. v. Gallery Pictures Inc. (1990), 75 O.R. (2d) 273 (Gen. Div.); Canada Square Corp. v. VS Services Ltd. (1981), 34 O.R. (2d) 250, 130 D.L.R. (3d) 205, 15 B.L.R. 89 (C.A.); Elevated Construction Ltd. v. Nixon (1969), 9 D.L.R. (3d) 232 (H.C.J.); Lehndorff General Partner Ltd. (Re) (1993), 9 B.L.R. (2d) 275, 17 C.B.R. (3d) 24 (Ont. Gen. Div.); Litowitz v. Standard Life Assurance Co. (Trustee of) (1996), 30 O.R. (3d) 579, 143 D.L.R. (4th) 77, 5 R.P.R. (3d) 161 (C.A.); Madison County Bank v. Gould, 5 Hill 309 (Sup. Ct. N.Y. 1843); Sadler v. Whiteman, [1910] 1 K.B. 868 (C.A.); Wabi Iron Works v. Patricia Syndicate (1923), 54 D.L.R. 640 (C.A.)

 

Statutes referred to

 

Canada Business Corporations Act, R.S.C. 1985, c. C-44, s. 15(1) Limited Partnerships Act, R.S.O. 1990, c. L.16 (as amended 1989, c. 69), ss. 2, 3(1), (2), 4(1), 5, 7, 8, 9, 13 Mortgages Act, R.S.O. 1990, c. M.40, s. 18 Partnerships Act, R.S.O. 1990, c. P.5, ss. 2, 5, 6, 10 (am.

1998, c. 2, s. 2(2)), 21(1) Registry Act, R.S.O. 1990, c. R.20, s. 48(2)

 

Rules and regulations referred to

 

Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rule 8.01(1) Authorities referred to 35 Halsbury’s Laws of England, 4th ed. (London: Butterworths, 1994), p. 136 68 Corpus Juris Secundum, “Partnership”, pp. 506-07, 1024 Banks, Lindley & Banks on Partnership, 17th ed. (Sweet & Maxwell, 1995), p. 864 Donohue and Quinn, Real Estate Practice in Ontario, 5th ed. (Markham, Ont.: Butterworths, 1995), p. 115 Manzer, Canadian Partnership Law (Aurora, Ont.: Canada Law Book, 1995), p. 9-5 et seq. Watson, Borins and Williams, Canadian Civil Procedure (Toronto: Butterworths, 1973), pp. 560-63

 

APPEAL from an order of Ground J. (1997), 32 O.R. (3d) 548 (Gen. Div.) dismissing an application for a declaration that a limited partnership with a corporate general partner was entitled to redeem a mortgage pursuant to s. 18(1) of the Mortgages Act, R.S.O. 1990, c. M.40.

 

Robert D. Malen, for appellant. Malcolm M. Mercer, for respondent, The Canada Life Assurance Company. Ian V.B. Nordheimer, for respondent, Hongkong Bank Trust Company. Peter K. Doody, for respondent, Gowling Strathy & Henderson. Warren H.O. Mueller, Q.C., for respondent, Fasken Campbell Godfrey.

 

The judgment of the court was delivered by

BORINS J.A.: — The issue raised by this appeal is whether, or under what circumstances, a limited partnership is entitled to rely on the statutory right of prepayment provided by s. 18(1) of the Mortgages Act, R.S.O. 1990, c. M.40, to discharge a long-term closed commercial mortgage purported to have been given by the limited partnership.

In an application brought against the mortgagee by the limited partnership in its firm name, Kucor Construction

& Developments & Associates (“Kucor”), a declaration was sought that the limited partnership had the right to “redeem” the mortgage under s. 18(1). The application was dismissed by Ground J., whose reasons for judgment are reported at (1997),

32 O.R. (3d) 548. Additional relief was claimed which, in the view I hold of this appeal, it is unnecessary to consider.

 

In summary, it was held by Ground J. that although the mortgage was purportedly given by Kucor, as a limited partnership is not a legal entity capable of holding title to real property, or transferring title under a mortgage on the property, it was incapable of giving the mortgage. He interpreted the mortgage document as having been entered into by the general partner, Kucor Construction & Developments Ltd. (“Kucor Ltd.”), on behalf of the limited partners. As Kucor Ltd. is a corporation within the meaning of s. 18(2) of the Act, he held that it is precluded from prepaying the mortgage under s. 18(1). I agree with the conclusion of Ground J. that, in the circumstances of this appeal, s. 18(2) precludes the operation of s. 18(1) of the Act. However, as I will explain, I do not agree with certain findings and conclusions which he reached in dismissing the application.

The Legislation

Section 18(1) of the Mortgages Act gives any person, and this includes a corporation, liable to pay or entitled to redeem a mortgage which is not payable until a time more than five years after the date of the mortgage, the right to prepay the outstanding balance on the mortgage after the expiry of five years. This section states:

18(1) Where any principal money or interest secured by a mortgage of freehold or leasehold property is not, under the terms of the mortgage, payable until a time more than five years after the date of the mortgage, then, if at any time after the expiration of such five years any person liable to pay or entitled to redeem tenders or pays to the person entitled to receive the money the amount due for principal money and interest to the time of such tender or payment, together with three months further interest in lieu of notice, no further interest is chargeable, payable or recoverable at any time thereafter on the principal money or interest due under the mortgage.

Section 18(2) of the Act exempts corporate mortgagors from the protection afforded by s-s. (1). It states:

18(2) This section does not apply to any mortgage given by a joint stock company or other corporation nor to any debenture issued by any such company or corporation for the payment of which security has been given on freehold or leasehold property.

As I will be making reference to certain sections of the Partnerships Act, R.S.O. 1990, c. P.5 and the Limited Partnerships Act, R.S.O. 1990, c. L.16, it is convenient to reproduce these sections. The following provisions are in the Partnerships Act:

2. Partnership is the relation that subsists between persons carrying on a business in common with a view to profit, but the relation between the members of a company or association that is incorporated by or under the authority of any special or general Act in force in Ontario or elsewhere, or registered as a corporation under any such Act, is not a partnership within the meaning of this Act.

. . . . .

5.  Persons who have entered into partnership with one another are, for the purposes of this Act, called collectively a firm, and the name under which their business is carried on is called the firm name.

 

6.  Eery partner is an agent of the firm and of the other partners for the purpose of the business of the partnership, and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he or she is a member, bind the firm and the other partners unless the partner so acting has in fact no authority to act for the firm in the particular matter and the person with whom the partner is dealing either knows that the partner has no authority, or does not know or believe him or her to be a partner.

. . . . .

10. Every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while the person is a partner, and after the partner’s death the partner’s estate is also severally liable in a due course of administration for such debts and obligations so far as they remain unsatisfied, but subject to the prior payment of his or her separate debts.

. . . . .

21(1) All property and rights and interests in property originally brought into the partnership stock or acquired, whether by purchase or otherwise, on account of the firm, or for the purposes and in the course of the partnership business, are called in this Act “partnership property”, and must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement.

The following provisions are in the Limited Partnerships Act:

2(1) A limited partnership may, subject to this Act, be formed to carry on any business that a partnership without limited partners may carry on.

(2) A limited partnership shall consist of one or more persons who are general partners and one or more persons who are limited partners.

3(1) A limited partnership is formed when a declaration is filed with the Registrar in accordance with this Act.

(2) A declaration shall be signed by all of the general partners desiring to form a limited partnership and shall state the prescribed information.

 

. . . .

4(1) The general partners of every limited partnership other than an extra-provincial limited partnership shall maintain a current record of the limited partners stating, for each limited partner, the prescribed information.

. . . . .

5(1) A person may be a general partner and a limited partner at the same time in the same limited partnership.

(2) A person who is at the same time a general partner and a limited partner in the same limited partnership has the rights and powers and is subject to the restrictions and liabilities of a general partner except that in respect of the person’s contribution as a limited partner the person has the same rights against the other partners as a limited partner.

. . . . .

7(1) A limited partner may contribute money and other property to the limited partnership, but not services.

(2) A limited partner’s interest in the limited partnership is personal property.

 

8.  A general partner in a limited partnership has all the rights and powers and is subject to all the restrictions and liabilities of a partner in a partnership without limited partners except that, without the written consent to or ratification of the specific act by all the limited partners, a general partner has no authority to,

(a)  do any act in contravention of the partnership agreement;

(b)  do any act which makes it impossible to carry on the ordinary business of the limited partnership;

(c)  consent to a judgment against the limited partnership;

(d)  possess limited partnership property, or assign any rights in specific partnership property, for other than a partnership purpose.

. . . . .

9.  Subject to this Act, a limited partner is not liable for the obligations of the limited partnership except in respect of the value of money and other property the limited partner contributes or agrees to contribute to the limited partnership, as stated in the record of limited partners.

. . . . .

13(1) A limited partner is not liable as a general partner unless, in addition to exercising rights and powers as a limited partner, the limited partner takes part in the control of the business.

(2) For the purposes of subsection (1), a limited partner shall not be presumed to be taking part in the control of the business by reason only that the limited partner exercises rights and powers in addition to the rights and powers conferred upon the limited partner by this Act.

Facts

The limited partnership, Kucor, was created by a limited partnership agreement entered into on March 12, 1976, by Kucor Ltd., as general partner, and a number of other corporations and individuals as limited partners.

As set out in the agreement, the intent of the parties in forming the limited partnership was to create an investment vehicle for acquiring certain real property in Cornwall, Ontario on which a large apartment building was to be constructed. It also stated that the purposes of the agreement were, inter alia, to make provisions for “the holding of title to the Lands and Building by the Limited Partnership” and the construction of the building. Ultimately, two apartment buildings were constructed.

The terms of the agreement provided, inter alia, that Kucor Ltd., as general partner, was to be in charge of the management, conduct and operation of the business of the limited partnership, including the execution of all agreements related to the acquisition of the land and the construction of the building on it. The agreement prohibited the limited partners from taking part in the management of the limited partnership and stipulated that they did not have the power to sign for or bind the partnership. In particular, it precluded a limited partner from mortgaging his interest in the limited partnership without the consent of the general partner. In addition, the agreement obligated each limited partner to execute a guarantee of any loan required to purchase the land or finance the construction of the apartment building, the guarantee to be limited to the amount of capital contributed by the limited partner to the partnership relative to the total capital contributed by all limited partners.

On March 30, 1976, Kucor Ltd., as grantor, conveyed the Cornwall property to the limited partnership, as grantee. The land transfer tax affidavit, sworn by Garth Drabinsky, as president of Kucor Ltd., stated:

Land taken in trust for limited partnership to be formed; Trustee now conveying to beneficiary. The grantee has been the sole beneficial owner during the entire period the lands have been or will be registered in the name of the grantor.

In an indenture made on September 8, 1977, the limited partnership, as mortgagor, gave a mortgage on the property in the amount of $6,160,050, with interest equal to 12 per cent per annum, to the Maritime Life Assurance Company (“Maritime”). The mortgage was for a five-year term, maturing on May 1, 1982. The mortgage was signed by Norman Goldman on behalf of the mortgagor, which was described as “KUCOR CONSTRUCTION & DEVELOPMENTS & ASSOCIATES, by its general partner KUCOR CONSTRUCTION & DEVELOPMENTS LTD.”. In an affidavit required by the Planning Act, Mr. Goldman described himself as secretary of the mortgagor, “Kucor Construction & Developments Ltd. [sic] & Associates”. Each limited partner executed the mortgage as a guarantor in an amount approximately equivalent to his, or its, capital contribution. Kucor Ltd. also executed the mortgage as a guarantor. At that time there were 17 limited partners, at least two of whom were corporations.

Subsequently, the maturity date of the mortgage was extended to January 1, 1983. On March 9, 1983, Maritime assigned the mortgage to Morguard Trust Company (“Morguard”). As a result, the term of the mortgage was extended to March 1, 1988 and the rate of annual interest was increased to 13.875 per cent. The limited partners remained as guarantors of the mortgage debt in proportion to the amounts of their respective capital contributions to the limited partnership.

On August 1, 1987 the mortgage was amended, and extended, for a third and final time. The amendment followed substantial negotiations between Kucor Ltd. and Morguard which resulted in a decrease of the annual interest on the mortgage loan to 11.96 per cent and an extension of the term for 15 years commencing July 1, 1987 and maturing on July 1, 2002. A negotiated term of the amending agreement was that the mortgage was not open for repayment before its maturity. This term, which is preceded by the sub-heading “Prepayment Privilege” states: “This Mortgage shall have no prepayment privileges for the full term of the loan”. Like the previous agreements, this agreement was executed by “KUCOR CONSTRUCTION & DEVELOPMENTS & ASSOCIATES, a limited partnership, by its sole general partner KUCOR CONSTRUCTION & DEVELOPMENTS LTD.”, which affixed its corporate seal to its signature. As before, the limited partners executed the amending agreement as guarantors in accordance with their individual capita l contributions to the limited partnership. At that time there were 23 limited partners; each of whom was an individual. Kucor Ltd. signed as an additional covenantor.

On September 3, 1987, the limited partners passed a resolution authorizing Kucor Ltd., as general partner, to execute the amending agreement with Morguard on behalf of the limited partnership. The relevant clauses of the resolution provided as follows:

3.    The execution by Kucor Construction & Developments Ltd., as General Partner on behalf of the Partnership of a Mortgage Amending and Extending Agreement regarding Partnership Property, known municipally as 1430 & 1450 First Street East, Cornwall, Ontario with Morguard Trust Company for the amount of $6,089,241.50 bearing interest at the rate of eleven and ninety-six one hundredths (11.96%) per centum per annum for a term of five years [sic] and the delivery of the Agreement by the General Partner as well as the execution and delivery of such other documentation as may be required under the provisions of the Commitment Letter on behalf of the Partnership is hereby authorized and approved;

4.    The General Partner is hereby authorized on behalf of and in the name of the Partnership to do all other acts and things and to sign all such documents, which may, in its opinion, be necessary, or desirable to give effect to the Commitment Letter.

On September 24, 1987, Kucor Ltd.’s board of directors approved a similar resolution which, correctly, referred to a 15-year extension of the mortgage, rather than a 5-year extension as stated in cl. 3.

On October 5, 1987, Morguard changed its name to Metropolitan Trust Company, which in turn changed its name on October 27, 1995 to Hongkong Bank Trust Company (“Hongkong”). The respondent, the Canada Life Assurance Company (“Canada Life”), is the actual investor in the mortgage, while Hongkong is the mortgage administrator.

The application before Ground J. was precipitated by an exchange of correspondence in the spring of 1996 between the solicitor for the limited partnership and the solicitors for Hongkong and Canada Life. The solicitor for the limited partnership wrote to Hongkong stating that the partnership intended to prepay the mortgage under s. 18(1) of the Mortgages Act as it wished to take advantage of favourable interest rates, and requested that appropriate arrangements be made.

Counsel for Hongkong denied the request on the ground that as the mortgage had been given on behalf of the limited partnership by its general partner, Kucor Ltd., a corporation, the right to prepay the mortgage under s. 18(1) was precluded by s. 18(2). Counsel for the limited partnership responded and took the position that as the mortgagor was the limited partnership, and not Kucor Ltd., s. 18(1) was applicable. Before both Ground J., and this court, the limited partnership and the mortgagee maintained their respective positions.

The law firms Gowling Strathy & Henderson and Fasken Campbell Godfrey, solicitors for Morguard and the limited partnership respectively at the time the mortgage was amended and extended in 1987, were granted intervenor status by an order granted by Master Peterson on November 12, 1996. The law firms were given leave to intervene as “added parties Respondent to the Application with all rights of such a Respondent including rights of appeal”, and the title of the application was amended accordingly. Paragraph 3 of the order reads as follows:

AND THIS COURT ORDERS that the entitlement of or obligation of any of the parties to the Application other than the Intervenors to be paid costs by the Intervenors or to pay costs to the Intervenors, as the case may be, shall be in the discretion of the Judge hearing the Application.

Reasons of the Motions Judge

At p. 553 of his reasons for judgment, Ground J. characterized the issues before him as follows:

The principal issue to be determined on this application is whether the limited partnership is a “person liable to pay or entitled to redeem” the mortgage and whether the mortgage, which is the subject matter of this application, was “given by a joint stock company or other corporation”. Subsidiary issues to be determined are whether parties may contract out of the provisions of the Mortgages Act and the significance, if any, of the corporate seal of Kucor being affixed to the third amendment.

With respect, Ground J.’s broad characterization of the issues made the resolution of the application unnecessarily complicated. As well, it is unfortunate that in his view the decision of this court in Litowitz v. Standard Life Assurance Co. (Trustee of) (1996), 30 O.R. (3d) 579, 143 D.L.R. (4th) 77 was of no assistance in deciding the application. That appeal involved the interpretation, and application, of s. 18 of the Mortgages Act, and its counterpart, s. 10 of the Interest Act, R.S.C. 1995, c. I-15, to three mortgages. As I will elaborate, Robins J.A., on behalf of the court, held at pp. 585 and 591, that the only issues to determine in deciding whether s. 18(1) applies to a particular mortgage are by whom the mortgage was “given” within the meaning of s. 18(2), and whether that entity is “a joint stock company or other corporation”.

Instead of focusing on the issues identified by Robins J.A., Ground J. first considered who was “liable to pay or entitled to redeem” the mortgage for the purpose of s. 18(1). He concluded that the general partner, Kucor Ltd., and the limited partners “collectively” were persons liable to pay the mortgage on the basis of their guarantees and, therefore, were entitled to prepay the mortgage under s. 18(1). He also concluded that there is no authority “for the proposition that a limited partnership is a joint stock company or would be included within the term joint stock company” (p. 554).

Ground J. then concluded that a limited partnership is not a legal entity capable of holding title to real property and mortgaging it. His analysis supporting this conclusion and the dismissal of the application is found at pp. 554-55:

To revert to basic legal principles, the law regards as persons with distinct and separate legal rights only individuals and corporations. A partnership may be recognized in law as an association of persons with certain distinctive characteristics and one which, in accordance with rule 8.01 of the Rules of Civil Procedure, is entitled to commence proceedings or have proceedings commenced against it in the name of the partnership. The concept of partnership property is also recognized in law but this does not mean that it is property owned by the partnership but rather property in which all of the partners have undivided interests. In a limited partnership, the legal title is held by the general partner for the benefit of all of the partners. None of these factors, in my view, constitutes a partnership a legal entity or person having a separate existence recognized in law and accordingly being capable of holding title to property and mortgaging or creating security on such property. I find, therefore, that t he limited partnership is incapable of holding title to the mortgaged property and accordingly the deed from Kucor to the limited partnership must be regarded as a nullity and the title to the real property remains with Kucor which holds the property for the benefit of all of the partners in the limited partnership. With respect to the mortgage documents, they must, in my view, be interpreted as having been entered into by Kucor in its capacity as general partner of the limited partnership on behalf of all of the partners. This is consistent with the terms of the limited partnership agreement and with the resolution passed by the partners authorizing the mortgage.

In addition, the motions judge considered the ability of the parties to contract out of the provisions of s. 18(1) of the Mortgages Act, although he recognized that this issue was moot as a result of his finding that s. 18(1) was not available to the mortgagor. Nevertheless, on the basis of the decision of this court in Litowitz, he concluded that the provision of the amending agreement precluding prepayment would be unenforceable.

In respect to a procedural point, Ground J. expressed doubt in respect to whether the application had been properly brought in the name of the limited partnership as applicant. At p. 554 he stated:

The notice of application may be technically flawed in that the applicant is shown as the limited partnership but clearly leave would be granted to amend the application to show the general partner as a co-applicant on behalf of itself and the individual limited partners.

Discussion

In my view, the starting point in determining whether s. 18(1) of the Mortgages Act is available to permit prepayment of the mortgage, as Robins J.A. held in the Litovitz case, is s. 18(2) of the Act. If, pursuant to s. 18(2), the mortgage was “given by a joint stock company or other corporation”, prepayment is precluded. As I have indicated, the position of counsel for the limited partnership is that the mortgage was given by the partnership and that as a limited partnership is neither a joint stock company, nor a corporation, it was entitled to prepay the mortgage. Central to this position is the issue whether a limited partnership is a discrete legal entity capable of holding title to real property, and conveying title upon the mortgaging of the property. Counsel for the respondents and the intervenors are united in their submission that a limited partnership is not a legal entity. In my opinion, they are correct.

Well respected authorities are uniform in the view that a limited partnership is not a legal entity. In 35 Halsbury’s Laws of England, 4th ed. (London: Butterworths, 1994) at p. 136 it is stated: “A limited partnership, like an ordinary partnership, is not a legal entity”. In R.C.P. Banks, Lindley & Banks on Partnership, 17th ed. (Sweet & Maxwell, 1995) it is said at p. 864: “A limited partnership is not a legal entity like a limited company but a form of partnership with a number of special characteristics introduced by the Limited Partnerships Act 1907”. See, also, Sadler v. Whiteman, [1910] 1 K.B. 868 (C.A.), per Farwell L.J. at p. 889; Re Lehndorff General Partner Ltd. (1993), 17 C.B.R. (3d) 24 at p. 39, 9 B.L.R. (2d) 275 (Ont. Gen. Div.). The concept that neither a general, nor a limited partnership, is a legal entity has been long accepted by Canadian and English law and, no doubt, is why a limited partnership is required by law to have a general partn er through which it normally acts: Limited Partnerships Act, ss. 2(2), 8 and 13. As for a general partnership, s. 6 of the Partnerships Act describes through whom it may act.

As Farley J. observed in the Lehndorff case at p. 38, a lmited partnership is a creation of statute. As such, had the legislature intended to create a new legal entity it is reasonable to conclude that it would have done so in the Limited Partnerships Act, as it did in s. 15 of the Business Corporations Act, R.S.O. 1990, c. B.16, which provides that a “corporation has the capacity and the rights, powers and privileges of a natural person”: see, also, the Canada Business Corporations Act, R.S.C. 1985, c. C-44, s. 15(1). This conclusion finds support in an examination of the history of the limited partnership: Alison R. Manzer, Canadian Partnership Law (Aurora, Ont.: Canada Law Book, 1995) p. 9-5 et seq. Legislation enacting corporations and limited partnerships occurred relatively contemporaneously in the 19th century in England, Canada and the United States. The enactment of separate, and fundamentally, different structures for the corporation and the limited partnership indicates that legislatures did not intend to invest the limited partnership with legal status. Indeed. as I will discuss, a limited partnership is a special kind of general partnership.

It follows that Ground J. was correct in holding that a limited partnership is not a legal entity.

As a limited partnership is not a legal entity, it becomes necessary to determine how a limited partnership carries on its business, and, in particular, how it can acquire, and hold title to, real property.

In the Lehndorff case, at pp. 38-40, Farley J. has provided a very helpful explanation of the features of a limited partnership and how its business is conducted. His reference to “Ontario LPA” is to the Limited Partnership Act:

A limited partnership is a creation of statute, consisting of one or more general partners and one or more limited partners. The limited partnership is an investment vehicle for passive investment by limited partners. It in essence combines the flow through concept of tax depreciation or credits available to “ordinary” partners under general partnership law with limited liability available to shareholders under corporate law. See Ontario LPA sections 2(2) and 3(1) and Lyle R. Hepburn, Limited Partnerships, (Toronto: De Boo, 1991), at p. l-2 and p. 1-12. . . . A general partner has all the rights and powers and is subject to all the restrictions and liabilities of a partner in a partnership. In particular a general partner is fully liable to each creditor of the business of the limited partnership. The general partner has sole control over the property and business of the limited partnership: see Ontario LPA ss. 8 and 13. Limited partners have no liability to the creditors of the limited partnership’s business; the limited partners’ financial exposure is limited to their contribution. The limited partners do not have any “independent” ownership rights in the property of the limited partnership. The entitlement of the limited partners is limited to their contribution plus any profits thereon, after satisfaction of claims of the creditors. See Ontario LPA sections 9, 11, 12(1), 13, 15(2) and 24. The process of debtor and creditor relationships associated with the limited partnership’s business are between the general partner and the creditors of the business. In the event of the creditors collecting on debt and enforcing security, the creditors can only look to the assets of the limited partnership together with the assets of the general partner including the general partner’s interest in the limited partnership. This relationship is recognized under the Bankruptcy Act (now the BIA) sections 85 and 142.

. . . . .

It appears to me that the operations of a limited partnership in the ordinary course are that the limited partners take a completely passive role (they must or they will otherwise lose their limited liability protection which would have been their sole reason for choosing a limited partnership vehicle as opposed to an “ordinary” partnership vehicle). . . . The limited partners leave the running of the business to the general partner and in that respect the care, custody and the maintenance of the property, assets and undertaking of the limited partnership in which the limited partners and the general partner hold an interest. The ownership of this limited partnership property, assets and undertaking is an undivided interest which cannot be segregated for the purpose of legal process. . . . The limited partners have two courses of action to take if they are dissatisfied with the general partner or the operation of the limited partnership as carried on by the general partner

— the limited partners can vote  to (a) remove the general partner and replace it with another or (b) dissolve the limited partnership.

Although a limited partnership is a partnership, and the Partnerships Act, which governs general partnerships, would apply to it unless its provisions are inconsistent with those of the Limited Partnerships Act, there are at least two important distinctions between a general partnership and a limited partnership which are evident from the provisions of the two Acts quoted earlier. The first distinction is that in a general partnership all of the partners are liable for the obligations of the partnership, whereas in a limited partnership the general partner is fully liable for partnership obligations, with the financial exposure of limited partners being limited to their contributions to the partnership. The second distinction is that in a general partnership any partner can conduct the usual business of the partnership, whereas in a limited partnership the limited partners are passive and the general partner manages and controls the business of the partnership.

It is important to emphasize that unlike a general partnership, a limited partnership has a special category of partner, a limited partner, whose obligation to the partnership is restricted to the contribution of its capital. By s. 13(1) of the Limited Partnerships Act, a limited partner is restricted from active participation in the business affairs of the partnership, in return for which he or she is given limited liability, similar to a shareholder in a corporation. Involvement by a limited partner in the business of the partnership may result in the loss of limited liability by that partner.

It follows, therefore, from the statutory characteristics of a limited partnership that if its management and control are the exclusive responsibility of the general partner, who derives its powers from the Limited Partnerships Act, it is through the general partner that a limited partnership acquires and conveys title to real property. “Title [to real property] is normally registered with the name of a general partner”:

D.J. Donahue and P.D. Quinn, Real Estate Practice in Ontario, 5th ed. (Markham, Ont.: Butterworths, 1995) at p. 115. It is, in my view, most unlikely that limited partners, as partners in a general partnership are required to do, would exercise the option of taking title in their own names, and thereby risk exposing themselves to unlimited liability by virtue of s. 13 of the Limited Partnerships Act. That a limited partnership, not being a legal entity, is incapable of acquiring title to real property finds recognition in s. 48(2) of the Registry Act,  R.S.O. 1990, c. R.20, which provides that the only entities known to law capable of acquiring title to real property are limited companies and individuals.

We were not provided with the decision of any Canadian court which specifically addressed the issue of how title to real property is to be taken by a limited partnership. However, it would appear that in Elevated Construction Ltd. v. Nixon (1969), 9 D.L.R. (3d) 232 (Ont. H.C.J.), which was a Vendors & Purchasers Act application, Osler J. was of the view that title is to be taken in the name of the general partner. In 68 Corpus Juris Secundum, “Partnership”, p. 1024 the early case of Madison County Bank v. Gould, 5 Hill 309 (Sup. Ct. N.Y. 1843) is cited as authority for the proposition that legal title to real property acquired by a limited partnership should be registered in the names of the general partners and not the limited partners. At p. 313 the court held:

The title to the mill should have been taken in the names of the general partners alone. The legislature evidently intended that the legal title to all the partnership property should be vested in the general partners; that they should sue and be sued; and that the whole business should be conducted just as though there were no special partner in the case.

A “special” partner was the equivalent of a limited partner.

In summary, because a limited partnership is not a legal entity capable of holding and conveying title to real property, provision is made in the Limited Partnerships Act for a general partner to conduct and manage the business of the limited partnership, including acquiring and conveying real property on its behalf. On the facts of this appeal, this was recognized by the general partner and the limited partners.

The limited partnership agreement of March 12, 1976, which created the limited partnership, provided that Kucor Ltd., as general partner, was to be in charge of the management, conduct and operation of the business of the limited partnership, including the execution of all agreements related to the acquisition of the land and the construction on it of the apartment buildings. Although in the original mortgage of September 8, 1977 to Maritime, Kucor was described as the mortgagor, it was executed by Kucor Ltd. in its capacity as the sole general partner of Kucor. Similarly, when the final extension of the mortgage occurred on August 1, 1987, the amending agreement, which was between Kucor, as mortgagor, and Morguard, as mortgagee, was executed by Kucor Ltd. in its capacity as the sole general partner of Kucor. In each instance, each limited partner executed a guarantee of the mortgage debt, but did not join in the mortgage as a mortgagor. As of August 1, 1987, there were 23 limited partners, each of whom was  an individual. In addition, the limited partners and the board of directors passed resolutions authorizing Kucor Ltd., as general partner, to execute the amending agreement extending the term of the mortgage by 15 years and reducing the rate of interest on the mortgage debt.

In my opinion, it is clear on the facts and the law, that the mortgage was given by Kucor Ltd., and as it is a corporation, it is precluded by s. 18(2) of the Mortgages Act from prepaying the mortgage under s. 18(1). It follows that Ground J. was correct in dismissing the application.

A more troubling problem is presented by Ground J.’s finding that the deed of March 30, 1976 by which Kucor Ltd. conveyed the property to the limited partnership was a nullity because a limited partnership is incapable of holding title to land, with the result that title remained with Kucor Ltd. which continued to hold the property “for the benefit of all of the partners in the limited partnership”. To hold that the deed was a nullity means that it lacked legal validity and the conveyance did not occur.

To resolve the problem, it is necessary to determine the intent and purpose of the conveyance. In my view, this does not cause this court any difficulty as the record, which contains no disputed evidence, points to only one conclusion. From the land transfer tax affidavit in the deed, it is learned that Kucor Ltd. had acquired the property in trust for a limited partnership to be formed and that the intent and purpose of the conveyance were to convey the land to the limited partnership which, as I have indicated, had been formed. The difficulty, of course, was that the grantee should not have been the limited partnership as such. It should have been either the general partner, or all of the partners.

In my view, the intent of the deed was to convey the property from Kucor Ltd., which had acquired it in trust for a limited partnership to be formed, to itself in its capacity as the general partner of the limited partnership. Any doubt that this was the intent of the deed is resolved by the mortgage and its extension. The mortgage and the extension agreements were executed by Kucor Ltd., in its capacity as general partner. If the deed had been intended to be a deed to each limited partner, then each of them would necessarily have executed these documents as mortgagors, whereas they executed them as guarantors. Thus, any doubt about the intended grantee is resolved by this subsequent conduct: Canada Square Corp. v. VS Services Ltd. (1981), 34 O.R. (2d) 250 at pp. 260-61, 130

D.L.R. (3d) 205 (C.A.).

Although by the form of the conveyance the deed was not capable of fulfilling its intended purpose, taking a functional approach, based on the above analysis it is clear that in fact it did. Its purpose was to regularize the commercial reality that the land was no longer solely the property of Kucor Ltd., but was the property of the limited partnership, and that in its capacity as general partner, Kucor Ltd. held title to it on behalf of all the partners. In my view, it was unnecessary to treat the deed as a nullity. It should be regarded as an ill- conceived attempt to convey title to the limited partnership. As this could be accomplished either by a conveyance to the general partner, or to all partners, it should be considered as a deed by Kucor Ltd. to itself in its capacity as general partner. Support for this conclusion is found in 68 Corpus Juris Secundum, “Partnership”, pp. 506-07 where it is stated that a deed to a limited partnership should be, and ordinarily would be, treated as transferr ing legal title to the general partner.

In the passage from Ground J.’s reasons which I have quoted in para. 24 (p. 587 post), he expressed the view that the application “may be technically flawed” as it was commenced by the limited partnership rather than by the general partner. As a limited partnership is a partnership, rule 8.01(1) of the Rules of Civil Procedure applies. It states:

8.01(1) A proceeding by or against two or more persons as partners may be commenced using the firm name of the partnership.

Neither the Partnerships Act, nor the Limited Partnerships Act, affects the application of this rule. Because a partnership is not a legal entity, it has no capacity to sue or be sued, with the result that proceedings must be brought by or against all members of the partnership individually. To overcome the practical problems of litigation involving partnerships whose membership is large, or when some partners live outside the jurisdiction, rule 8.01(1), and its predecessors, was introduced to recognize a partnership as a legal entity for the procedural purpose of suing or being sued in the firm name of the partnership: see G.D. Watson, S. Borins, N.J. Williams, Canadian Civil Procedure (Toronto: Butterworths, 1973), at pp. 560-63. Although the choice remains whether a proceeding will be brought in the name of the partnership or in the name of the individual partners, it is improper to do both: Wabi Iron Works v. Patricia Syndicate (1923), 54 D.L.R. 640 (C.A.). Ther efore, it is my view that the application was properly commenced in the name of the limited partnership and it would be improper to add the general partner as a party applicant: see also 872928 Ontario Ltd. v. Gallery Pictures Inc. (1990), 75 O.R. (2d) 273 (Gen. Div.).

As a result of my conclusion that the mortgage was given by a corporation and that, therefore, s. 18(1) of the Mortgages Act has no application, it is unnecessary to consider whether a limited partnership is a joint stock company within the meaning of s. 18(2), or whether the mortgagor made an effective tender within the meaning of s. 18(1).

Considerable argument was directed to whether the short answer to the application is contained in the negotiated provision in the amending agreement of August 1, 1987 that the mortgage was not open for repayment before its maturity. It was the position of the appellant that this provision was inoperative on the authority of the decision of this court in the Litowitz case, at p. 586, where it was stated that, because s. 18 is consumer protection legislation enacted in the public interest, as a matter of public policy it cannot be contracted out of or waived. On the other hand, the respondents took the position that this policy applied only to residential mortgages and not to commercial mortgages, such as the mortgage in this appeal. In my opinion, this is an issue which it is unnecessary to consider, or to decide, because of my conclusion that s. 18(2) precludes the operation of s. 18(1).

 

Conclusion

In the Litowitz case, this court heard together three appeals involving different factual situations, concerning the application of s. 18 of the Mortgages Act and s. 10 of the Interest Act. For the sake of convenience, I will refer to them as the Litowitz, the Vale and the Glied appeals. In each appeal, the mortgagor sought a declaration that it was entitled to prepay a long-term closed commercial mortgage. In none of the appeals was the mortgagor a limited partnership. As I have indicated, in his reasons for judgment Robins J.A. provided a thorough and helpful discussion of the history, the evolution and the policy of the relevant legislation at pp. 582-87.

The circumstances of the Litowitz appeal closely approximate those of this appeal. In Litovitz, the project in respect to which the mortgage was given was promoted by a prospectus as a multi-unit residential apartment building (“MURB”) and involved the construction, ownership and operation of a 20-storey apartment building. By way of the issue of securities, some 310 units of ownership were sold, mainly to individuals. However, the property was owned by a corporation, which gave the mortgage which was the subject of the application. As in this appeal, the unitholders chose to conduct their business through a corporation. In my view, the reasoning applied by Robins J.A. at pp. 591-94 in holding that s. 18(2) precluded prepayment under s. 18(1) has direct application to this appeal. I would respectfully adopt and apply his reasoning. In this appeal, the limited partners chose to conduct their business through at general partner, Kucor Ltd., which is a corporation. There is no question that the general partner was authorized by the limited partners to arrange the financing and, under the Limited Partnerships Act, was empowered and required to do so. Therefore, it was intended that the mortgage would be an obligation enforceable against the general partner. The fact that the beneficial ownership of the property was made up of limited partners who were individual, non-corporate investors does not detract from the fact that the mortgage was given by the corporate general partner, and accordingly, does not remove the mortgage from the exemption in s. 18(2) of the Mortgages Act, or entitle the limited partners to the right of prepayment under s. 18(1). It is not appropriate to look past the corporate entity. Lenders are entitled to rely on title documents to determine the mortgagor’s prepayment rights. The mortgage was, an d remains, a mortgage given by a corporation, with the result that prepayment is precluded by s. 18(2).  Assuming, without deciding, that because of their individual guarantees of the mortgage the limited partners may be “persons liable to pay or entitled to redeem” the mortgage under s. 18(1), the essential question in the application of s. 18 remains the identity of the person, or entity, that gave the mortgage. The opinion of Robins J.A. in Litowitz at p. 594 is determinative of this issue:

The scope of the right of prepayment is cast so as to include anyone who is liable to pay or entitled to redeem a mortgage. However, this right is subject to the exemption clause — and that clause is based on the identity of the party who gives a mortgage. A mortgage can be given only by a titleholder and, if the titleholder is a corporation, a mortgage given by the corporation will, by virtue of the exemption, be excluded from the protection afforded by s-s. (1). Liability to pay or entitlement to redeem a mortgage is not the criterion for determining the applicability of s- s. (1). Thus, accepting as I do that the unitholders may be “persons liable to pay or entitled to redeem”, the fact that the mortgages were given by a company precludes them from exercising the prepayment rights to which they would be entitled had the mortgage been given by a non-corporate mortgagor.

In the first paragraph of my reasons, I stated that the issue raised by this appeal is whether, or under what circumstances, a limited partner is entitled to rely on the statutory right of prepayment in s. 18(1) to discharge a long-term closed commercial mortgage purported to have been given by the limited partnership. I would respond to this issue as follows:

(1)A limited partnership, because it is not a legal entity, carries on its business through a general partner which has the power to hold and convey title to real property on behalf of the members of the limited partnership.

)A general partner which is a corporation and which gives a mortgage is precluded by s. 18(2) from the operation of s. 18(1) and, therefore, cannot prepay a long-term closed mortgage.

(3)A general partner which is an individual and which gives a mortgage is not subject to the s. 18(2) exemption and, therefore, is entitled to prepay the mortgage.

(4)Where there are two or more general partners, one of which is an individual, and the other a corporation and they are joint mortgagors, as decided by Robins J.A. in the Glied appeal, the individual, because he is liable for the entire mortgage debt, is not subject to the s. 18(2) exemption and, therefore, is entitled to prepay the mortgage.

(5)The fact that a mortgage is a long-term closed commercial mortgage is not relevant to the application of s. 18(2). The relevant issue is the identity of the person who gave the mortgage.

For all of the above reasons, the appeal is dismissed with costs to the respondents Canada Life and Hongkong. In the circumstances of this appeal, no costs are awarded to the intervenors.

 

1998 CanLII 4236 (ON CA)