Case Name:
LAURIN v. IRON ORE COMPANY OF CANADA
[1977] N.J. No. 96
19 Nfld. & P.E.I.R. 111
50 A.P.R. 111*
Newfoundland Supreme Court Trial Division
Goodridge, J.
September 2, 1977
(171 paras.)
CASES JUDICIALLY NOTICED:
Canadian Long Island Petroleum Ltd. et al. v. Irving Industries (Irving Wire Products Divisions) Ltd. et al., [1975] 2 S.C.R. 715, 3 N.R. 430, appld. [para. 46].
Stephens v. Gulf Oil Canada Ltd. (1975), 11 O.R. (2d) 129, appld. [para. 47].
Re Mckee and National Trust Co. Ltd. et al. (1975), 7 O.R. (2d) 614, appld. [para. 49]. Politzer v. Metropolitan Homes Limited, [1976] 1 S.C.R. 363, dist. [para. 60].
Stephen v. Black, [1902] Cout. S.C. 217, appld. [para. 79].
Stephens v. Gulf Oil Canada Limited (1975), 11 O.R. (2d) 129, appld. [para. 91]; [para. 100]. Muschamp v. Blue, [1617] J. Bridge 132, consd. [para. 93].
In re Cockerill, [1929] 2 Ch. D. 801. consd. [para. 94]; [para. 118].
Re Rosher (1884), 26 Ch. D. 801 consd. [para 118].
O’Rorke v. Boling broke (1877), 2 App. Cas. 814, appld. [para. 143].
[*page115] AUTHORS AND WORKS JUDICIALLY NOTICED:
Cheshire, Modern Real Property (9th ed.), p. 286 [para. 89]. DiCastri, Canadian Law of Vendor and Purchaser, para. 186 [para. 45]. Fratcher, Perpetuities and Other Restraints (1954) [para. 110].
Halsbury’s Lawa of England (2nd Ed.), vol. 15, pp. 282-283 [para. 143]. Schnebly, Restraints Upon the Alienation of Legal Interests (1935), 44 Yale L.J. 961, 1186, 1380 [para. 10].
COUNSEL:
EDWARD HEARN, for the plaintiff
JAMES R. CHALKER, Q.C., for the defendant
This case was heard on June 10, 1977, before GOODRIDGE, J., of the Newfoundland Supreme Court, Trial Division.
On September 2, 1977, GOODRIDGE, J., delivered the following judgment:
GOODRIDGE, J.:– The plaintiff purchased from the defendant certain lands and premises at Labrador City in the province of Newfoundland by deed (the “conveyance”) dated October 22, 1971, registered in Volume 1294 of the Registry of Deeds at folios 596 to 603.
The deed contains the following clauses:
“(2) That in consideration of the sum of one dollar ($ 1.00) Canadian Currency paid by the grantor to the grantee on or before the execution of these presents (the receipt whereof by the grantee is hereby acknowledged) and of the mutual convenants and all other considerations hereinafter mentioned the parties hereto respectively covenant and agree as follows:
Should the grantee cease to be employed by the grantor or should the grantor be required to make any payment under the guarantee, or should the grantee wish to sell the property hereby conveyed, the grantor is hereby granted the sole and exclusive option, irrevocable within the time limited herein for acceptance, [*page116] but exercisable at the time of the grantee ceasing to be employed by the grantor or of the grantor making payment under the guarantee or of the grantee wishing to sell the property, to repurchase the property hereby conveyed at the price equal to the principal amount repaid, (exclusive of repayments made by the grantor under the guarantee), on the mortgage at the time of repurchase, less any amounts paid by the grantor under or pursuant to the guarantee, less straight line depreciation of 2% per year on the original selling price of the property from the day and year first above written. On any repurchase by the grantor on exercise of this option the purchase price payable shall be adjusted by appropriate increase to cover cost of structural improvements to the property and appropriate decrease to reimburse the grantor for the cost of making good damages to the property over and above those resulting from normal wear and tear; provided that improvements for which compensation shall be permitted shall be restricted to those improvements which were approved in writing by the grantor prior to the commencement of work theron and shall in no event include landscaping or decoration; and further provided that the grantor shall be sole judge as to what damage to the property constitutes normal wear and tear and the grantee shall accept the
grantor’s decision in such respect.
The option granted pursuant to paragraph (i) of this clause (2) shall, subject to the conditions contained in said paragraph (i), be open for acceptance at any time within the period commencing on the date hereof and ending on the twenty first anniversary of the death of the longest lived of the descendants now living of Her Majesty Queen Elizabeth the Second.
(3) That the covenants and agreements hereinbefore contained shall enure to the benefit of and be binding upon each of the parties hereto and their respective heirs, administrators, successors and [*page117] assigns as fully and as effectually as if the same had been mentioned herein.”
Where it is necessary to refer to these clauses again, I will call them the “plaintiff’s undertaking” when speaking of them specifically and the “clauses” when discussing them generally in connection with the housing policy of the defendant.
The plaintiff seeks to have the plaintiff’s undertaking declared void and unenforceable on the grounds that:
“1. It violates the rule against perpetuities;
It is void for unreasonableness and uncertainty;
It is based on the false premise that the defendant had unconditionally guaranteed repayment of Kinross Mortgage Corporation of $ 25,000.00;
It constitutes a clog on the plaintiff’s equity of redemption;
It violates the rule against inalienability;
It violates the rule against remoteness of vesting;
It constitutes an illegal condition subsequent;
It is in violation of the rule against derogation from grant;
It is oppressive, unconscionable and ought to be set aside;
The defendant is estopped from enforcing the plaintiff’s undertaking by its conduct.”
The defendant has counterclaimed for declarations that the plaintiff’s undertaking runs with the land and is valid, legally binding and enforceable against the plaintiff and his successors in title.
Some background on the matter is useful in grasping the nature of the problem presented to the court.
The defendant commenced operations at Labrador City, [*page118] then known as Carol Lake, in 1959. The original plan called for the production capacity of 7,000,000 tons of iron ore concentrates a year. This capacity was increased considerably as the years went by.
There was at the very outset a need for housing for employees. As a result, 668 housing units were constructed by the defendant which were rented at $ 67.00 a month. The unit cost was $
23,500.00.
The defendant ultimately decided that the policy of rental was undesirable because the construction of rental units drew on funds otherwise available for expansion and because it was felt that a program sponsoring home ownership would create a better community spirit.
As a result, the rental units were offered for sale to the tenants for the sum of $ 8,000.00 each. There was, of course, no obligation on the part of the tenant to buy.
In 1966 a new housing program was developed. Under this program Central Mortgage and Housing Corporation or a lender approved by it would advance mortgage funds on the condition that the defendant guaranteed repayment of the same. The defendant would provide construction subsidies in the form of serviced lots, landscaping, subsidies on the living expenses of the construction workers, payment of legal fees, payment of interest during construction and the payment of the costs of transportation of materials to the site. There was to be no down payment on these homes.
There were 726 housing units built under this program. Although I have no specific evidence on it, I gather that there was restriction on resale contained in these documents as the union representing the men employed at the premises of the defendant in Labrador City requested that the home owners be allowed to sell on the open market. The defendant agreed to this provided it had a right of first refusal.
This program ultimately became undesirable from the point of view of the defendant, because unless it exercised its right of first refusal it lost control of the houses. In fact according to the evidence some 300 of these homes passed into the ownership of persons not employed by the defendant notwithstanding that the original costs had been substantially subsidized by it.
In 1971 a third policy was developed. This did not [*page119] differ significantly from the second policy except that there were embodied in the deeds of conveyances of the land so sold the clauses quoted above.
The sales were generally financed by one of three money lenders namely, Central Mortgage and Housing Corporation, Kinross Mortgage Corporation and The Bank of Nova Scotia. Monies advanced by these institutions on the security of the properties were guaranteed by the defendant.
It should be noted that the clauses purported to give to the defendant the right to repurchase the properties sold for a figure fixed by formula upon the occurrence of any one of three events. These were:
“1. The grantee ceasing employment with the defendant;
The defendant being required to make a payment under its guarantee of the mortgage;
and
The grantee desiring to sell the property.”
The formula price was an amount equal to the principal repaid on the mortgage less straight-line depreciation of two percent per year on the original consideration plus the value of improvements made to the property by the grantee with the consent of the defendant. (There was provision for adjustments in respect of payments made on the mortgage by the defendant and in cases where there was undue depreciation in value due to the act of the grantee.)
The reason for tying the repurchase price in with the mortgage rather than with the original consideration apparently was that when the properties were sold there was no down payment and if secondary financing was needed over and above the amount of the first mortgage it would be provided by the defendant on the security of a second mortgage.
This program was still found to be unsatisfactory to the union representing the employees, because the grantees of the property were unable to sell on the open market. If for any reason an employee wanted to sell, he could only resell if the defendant declined to exercise its rights under the clauses.
To accommodate this objection the defendant formulated a new policy which was expressed to the home owners in the [*page120] form of a letter. The following is the text of the letter received by the plaintiff dated January 4, 1974:
“The document covering the sale to you by Iron Ore Company of Canada of a housing unit contains a repurchase option granted to Iron Ore Company of Canada and exercisable under certain conditions.
This letter is to confirm that Iron Ore Company of Canada will not exercise its option to repurchase the housing unit under the following conditions:
– When the mortgage(s) is (are) paid in full at the end of the amortization period;
– When the mortgage balance(s) is (are) paid in full by a mortgage life insurance upon the death of the owner.
Should you wish to sell the property, provided you are still employed by Iron Ore Company of Canada and not be in default in the instalments due on the mortgage(s), and should you have a purchaser who is an active employee of Iron Ore Company of Canada eligible for housing, Iron Ore Company of Canada will repurchase the property from you as per the terms and conditions of the conveyance and resell it to such employee at the same terms and conditions.”
This statement of policy appears to be a gratuitous undertaking on the part of the defendant not necessarily binding upon it except in cases where it creates an estoppel.
It is with the last paragraph of that letter that we are primarily concerned in this case. The significance of the paragraph does not appear in the language used. It states in effect that, if the owner desires to sell to a person who is an employee of the defendant, the defendant will buy the property back and sell it to the buying employee on the same terms and conditions as it sold the property to the selling employee in first instance.
The significance lies in the fact that the policy enabled the owner to negotiate a sale of the property to another employee. From a practical point of view, the owner was able to sell his equity of redemption. From a legal point of view, the owner was not really selling the property at all but selling an undertaking to disignate to the defendant [*page121] the prospective purchaser as the new owner.
The defendant upon receipt of advice that the owner desired the prospective purchaser to become the new owner of the property would then process the exchange without reference to the agreement between the owner and prospective purchaser. It would calculate the purchase price by reference to the clauses, compensate the owner accordingly and then issue a deed to the purchaser conforming to the terms of the original conveyance.
In actual practice according to Kevin Campbell, a real estate agent who gave evidence, agreements of sale in a standard form were used when a sale was negotiated between an owner and prospective purchaser. The following is an example of part of one such agreement. This is in respect of another property. In it a vendor agreed to sell to a purchaser a property at a given address:
“. . . at the price of $ 35,000.00 of lawful money of Canada upon the following terms and conditions payable as follows:
$ 500.00 by cash/cheque for the agent to the vendor as a deposit to be held in trust by such agent pending completion or other termination of this agreement and to be credited on account of purchase money on closing and the balance of $ 35,000.00 as follows:
$ 7,000.00 cash down payment and the purchaser to assume the existing IOC subsidized first mortgage of approximately $ 28,000.00 . . .”
The actual mechanics of transfer are somewhat confusing. The Royal Trust Company was the agent of the defendant for the purpose. One of its mortgage officers, Philip Walters, testified.
According to his evidence when the sale of a property had been negotiated, the owner would call at the office of the defendant and sign in blank a document conveying the property back to the defendant and the prospective purchaser would in turn sign a conveyance containing the clauses.
When the real estate agent was advised that these two documents had been signed in blank, the deposit and down payment would then be released to the seller.
[*page122] [29] The seller then had his purchase price less the encumbrances and cost of selling. In due course the purchaser would receive his deed duly executed by the defendant.
It is not clear on the evidence whether the purchaser would get a new mortgage or assume the old one. As this information is not material to my findings herein, I need not comment on it further.
The difficulty encountered by buyers and sellers alike is that notwithstanding the revised policy of the company as set forth in the letter above, an owner would still be limited in the amount for which he could sell his property because the clauses limited the ability of the average prospective purchaser to raise funds to purchase the equity.
The ability of a prospective purchaser to borrow money on the security of a property is reflected by its market value. Its market value is influenced adversely by conditions attached to the title limiting its resale value.
Because properties such as that of the plaintiff are subject, or at least apparently subject to such conditions, a prospective purchaser is unable to raise funds to pay for the equity on the security of a second or third mortgage. By virtue of the conditions of the conveyance form used, such a mortgage could not provide a security of any value.
Therefore, the ability of a prospective purchaser to purchase the equity is limited to those funds he already has plus those which he can borrow without security. Apart from that, provisions limiting the resale value must influence the prospective purchaser.
These factors limit the market value of the properties. It is this perhaps as much as any other fact which has inspired this action but it is for reasons other than those that I find against the defendant herein.
A reader of this judgment ought not condemn the policy of the defendant which inspired the clauses without being aware of other factors.
Firstly, the properties were sold below cost. The plaintiff’s property was sold to him for $ 26,090.00, while its cost to the defendant was $ 34,468.00, for a subsidization of $ 8,378.00.
[*page123] [38] Secondly, the interest rate of the first mortgage in excess of four percent per annum was paid by the defendant and second mortgage funds where required provided by the defendant at four percent per annum. In this case the first mortgage was for $ 25,218.75 at 8 3/4 per cent per annum amortized over 30 years; the second mortgage was for $ 1,090.00 at four percent per annum amortized over 30 years. Assuming that the second mortgage funds were costing the defendant 8 3/4 percent per annum (they probably cost more but I am using that figure for rough calculation only), I calculate that the total interest subsidization over 30 years would amount to about $ 26,300.00. This would give it a capital value of about $ 9,000.00.
Thirdly, the defendant’s policy provides to its employees a pool of housing at reasonable cost. The result of the plaintiff succeeding in this matter would be to open that pool to non-employees. Only the initial owner would benefit by the cost subsidy which would not be passed on to the second and subsequent owners even if they were employees. Employees of the defendant would as a result have higher housing costs.
However, the social aspects of the matter do not play a part in my decision. I must examine the plaintiff’s undertaking to determine whether or not it is valid on the face of it making a determination of fact only to the extent that it is necessary and permissible to do so.
The question of whether the clauses are covenants running with the land or are merely personal obligations is raised by the counterclaim. As it becomes unnecessary for me to deal with the counterclaim, I propose to comment on this question in general terms only.
An option is regarded as an equitable interest in land. A right of first refusal is considered to be a contractual right and not an interest in land.
The third part of the so-called option contained in the clauses is a right to buy if the grantee decides to sell. This is a right of first refusal.
The first and second parts of the so-called option are not in my view options at all.
In DiCastri, Canadian Law of Vendor and Purchaser in [*page124] paragraph 186 the following definition appears:
“An option is a right acquired ex contractu to accept or reject a present offer within a limited, or, as the case may be, a reasonable time in the future, and, when otherwise validly constituted, vests in the optionee an interest in land.”
In Canadian Long Island Petroleum Ltd. et al. v. Irving Industries (Irving Wire Products Divisions) Ltd. et al., [1975] 2 S.C.R. 715, Martland, J., states as follows:
“An option gives to the optionee, at the time it is granted, a right, which he may exercise in the future, to compel the optionor to convey to him the optioned property . . .
The essence of an option to purchase is that, forthwith upon the granting of the option, the optionee upon the occurrence of certain events solely within his control can compel a conveyance of the property to him.”
Howland, J.A., examines the question of options and preemptive rights in Stephens v. Gulf Oil Canada Ltd. (1975), 11 O.R. (2d) 129, and concludes his examination with these words at page 154:
“The fundamental distinction between an option to purchase land and a right of first refusal is that an optionor grants to the optionee a right which is solely within the optionee’s control to compel a
conveyance of the optionor’s land at a future date.”
Unfortunately the keynote features of a preemptive right are not underlined but they are touched upon by Martland, J., in the Canadian Long Island Petroleum case, supra, where he said that the right of first refusal did not give a present right to require in the future a conveyance of the land. The right was not enforceable specifically at the time the agreement was executed. The right was purely contractual.
An option creates a contingent interest in land – the contingency being the election to exercise the option (see Re Mckee and National Trust Co. Ltd. et al. (1975), 7 O.R. (2d) 614).
[*page125] [50] No such contingent interest is created here. The position is that a contingent interest comes into existence upon the occurrence of one or more of certain events if they occur within the perpetuity period.
The clauses amount basically to a repurchase agreement. The first, second and third parts of the so-called options do not create a present right and are not specifically enforceable at the time of their creation.
It would appear to me that they would normally constitute contractual rights only and are not interests in land.
The nature of a repurchase agreement requires a more detailed examination to determine whether my conclusions are correct. I leave such examination to a case where that issue must be resolved. In this case, if my finding that the clauses are actually conditions of title imposed by the defendant, and not an interest in land or contractual rights created by the plaintiff, survives the reviews of higher courts, such resolution is unnecessary.
I will now deal with the specific points upon which the plaintiff claims to be entitled to relief.
PERPETUITIES.
The rule of perpetuities is that every future interest in land must be capable of vesting, if at all, within 21 years after its creation or within 21 years after the expiration of the life or lives of a designated person or designated persons in being at the time of its creation. If it is not, it is void.
The plaintiff’s undertaking clearly limits the time of vesting to 21 years after the death of the longest lived of the descendants then living of the Queen.
Counsel for the plaintiff argues that there is no certainty that the purported option would vest in interest within the perpetuity period. I cannot agree with this submission.
The rule is that the interest if it is going to vest at all must vest within the limitation period.
It is not open to the defendant to exercise the option after the expiration of the limitation period. Therefore, [*page126] there is no possibility of the interest created by the option vesting thereafter.
He cited the case of Politzer v. Metropolitan Homes Limited, [1976] 1 S.C.R. 363. The facts of that case are quite different. There, the option had to be exercised within 90 days of its creation, but the limitation period for the execution and delivery of a deed of conveyance pursuant to the agreement of sale arising upon the exercise of the option offended the rule against perpetuities. Although it was probable that there would be such execution and delivery within a shorter period, the court pointed out that the rule against perpetuities is concerned with the certainty of vesting not with the likelihood of vesting.
It should be noted that the rule is one relating to realty. If the view that I expressed above that repurchase rights are not interests in land but contractual rights only, then the question of perpetuities is not in issue.
2. UNREASONABLENESS AND UNCERTAINTY.
I know of no principle of law that provides that a contract shall be void for unreasonableness alone. Unreasonableness may be a factor for example in contracts involving infants, or in cases of oppression but never is it a factor by itself.
I will under the heading of restraint on alienation be testing the plaintiff’s undertaking for reasonableness but that is only for the purpose of classification.
A contract may be void for uncertainty. If it is so vague in its terms that it cannot be understood it has no effect at law or in equity.
The reason for this is obvious. The court will not enforce an agreement that is incapable of being understood.
I see no such difficulties in this case. I would frankly have expected to see provisions relating to notice between the parties but the absence of such provisions for notice does not in my view create sufficient uncertainty to declare the clauses void and unenforceable.
I cannot declare the provisions void for unreasonableness and I consider that I ought not to declare them void for uncertainty.
[*page127] 3. NO UNCONDITIONAL GUARANTEE.
In the recitals to the conveyance it is set forth that Kinross Mortgage Corporation had agreed to advance to the plaintiff the sum of $ 25,000.00 and that the defendant in order to assist the plaintiff unconditionally guaranteed the repayment of the said sum of $ 25,000.00.
In view of my finding under the following heading, it is unimportant to determine whether or not there was in fact such a guarantee. If there was no such guarantee, the provisions of the plaintiff’s undertaking relating to payments made by the defendant under the guarantee would never become operative. If there was, the repurchase right arising there-from is void as a clog on the equity.
I do not propose to trace the history of the liability of the defendant under the guarantee. It should perhaps be stated briefly that the defendant guaranteed to Central Mortgage and Housing Corporation any losses which it might sustain in respect of mortgage loans made under the National Housing Act to employees of the defendant. Central Mortgage and Housing Corporation in turn indemnified approved lenders against losses sustained in mortgages made by them under that Act.
By letter from the defendant to Kinross Mortgage Corporation dated April 11, 1972, (after the date of the mortgage from the plaintiff to Kinross Mortgage Corporation) the defendant confirmed that the loan to the plaintiff was subject to the guarantee agreement made between the defendant and Central Mortgage and Housing Corporation above referred to.
I will not make a definitive finding on the matter of the guarantee as it is not, as I have said, important for the purpose of determining whether or not the plaintiff’s undertaking is void.
The issue would only be important in a situation where the defendant purported to exercise its option based on payments made pursuant to the guarantee or claimed a revision in the purchase price because of payments made by it under the guarantee.
CLOG ON THE EQUITY OF REDEMPTION.
[*page128] [74] There is no obvious clog on the equity of redemption contained in the conveyance. It neither prohibits nor has the effect of prohibiting the plaintiff from redeeming either the first mortgage or the second mortgage.
Counsel for the defendant contend that the plaintiff obtained first mortgage funds from the Kinross Mortgage Corporation and second mortgage funds from the defendant, the former being assigned to the defendant, and that the whole transaction was essentially a borrowing transaction. He further contends that the purported option to purchase taken at the time of the loan is a clog on the equity of redemption and unenforceable.
His first contention scarcely merits comment. It described basically what takes place in a very high percentage of land transfers. There is first of all a conveyance of property, then a first mortgage to one of the several financial institutions engaged in money lending and occasionally a second mortgage either to a financial institution engaged in that business or to the vendor. The conveyance was part of a very ordinary transaction.
Insofar as the second contention is concerned I have reviewed the conveyance carefully and
can see nothing in it which prevents the defendant from redeeming the first mortgage or the second mortgage at any time.
The two mortgages incidentally have provisions for early redemption.
The matter of a clog on the equity is not so easily disposed of however. The principle stated by Davies, J., in Stephen v. Black, [1902] Cout. S.C. 217, is as follows:
“The equitable doctrine . . . is perfectly clear, and has been long established. It is that a mortgage creditor shall not be permitted to obtain, by or through any agreement made contemporaneously with the mortgage, any advantage by his security beyond his principal, interest and costs, and that, in such cases, equity will let a man loose from his agreement, or even against his agreement admit him to redeem a mortgage. Whatever his security may be, whether land, chattels, bond, note or covenant, the moment it appears that it is a security, the party cannot recover any more in equity than his debt, interest and costs, unless, of course, under some subsequent arrangement made between the parties.”
[*page129] [80] Following from this, it has been held that a mortgagee may not by his instrument of security take an “option” on the encumbered lands to the extent that he shall have the option to buy them if the mortgagor defaults.
The doctrine has been followed by judges, not always with much enthusiasm, down through the years. It derives from the principle that a document, once a mortgage, is always a mortgage.
If the ‘option’ is in fact a remedy, it is a clog on the equity of redemption. If it stands by itself and is not related to default, then it is not a clog.
In this case, the second part of the so-called option purports to give the defendant the right to purchase the land if the defendant is called upon to make a payment under the mortgage guarantee. Although the defendant is not the mortgagee, it is a guarantor of the mortgagee. Payment under the guarantee may result in the defendant being subrogated to the position of the mortgage.
The second part of the so-called option therefore can amount to a clog on the equity. As mortgagee by subrogation, the defendant would have an option to purchase as a remedy.
The mortgage would cease to be a mortgage and would become an ‘option’.
I realize that the conveyance and mortgage are two separate instruments executed and delivered at separate intervals of time. I reject the contention of counsel for the plaintiff that the whole transaction is essentially a borrowing one.
I base my finding on the fact that the defendant contemplates in the conveyance wearing the shoes of the mortgagee and seeks upon such occurrence to have the right to buy – a right which is a remedy and which clogs the equity. It is true that not every call upon the defendant to honour the
guarantee would result in a clog but the fact that it could clog at all offends the equitable principle and that makes the ‘option’ void.
INALIENABILITY.
This is perhaps the most difficult aspect of the case [*page130] to deal with.
The law on the subject is well stated by Cheshire, Modern Real Property, (9th Edition), at page 286, which reads as follows:
“In accordance with the cardinal principle that the power of alienation is necessarily and inseparably incidental to ownership it has been held in a long line of decisions that if an absolute interest is given to a donee — whether it be a fee simple, a fee interest, and whether it be in possession or in future — any restriction which substantially takes that power away is void as being repugnant to the very conception of ownership. Therefore, a condition that the donee . . . shall alienate only to one particular person . . . is void.”
The rule against restraints on alienation apparently has its origin in the statute of Quia Emptores. The primary purpose of that statute was to prevent the practice of the day of subinfeudation which resulted in the feudal landlords losing control of their property. As an incident of the abolition of subinfeudation, the right of unrestricted alienation of fee simple estates was pronounced without loss to the feudal landlords.
The continued existence of the rule and its development over the years is probably based on public policy more than the statute. In the case of Stephens v. Gulf Oil Canada Limited (1975), 11
O.R. (2d) 129, at page 156, Howland, J.A., said:
“The objections in principle to restraints on alienation are twofold. They keep property out of commerce and have a tendency to result in a concentration of wealth. They also tend to prevent improvement of property, since a landowner will be reluctant to make improvements when he cannot sell the property.”
(I am doubtful that they result in a concentration of wealth but I agree with the balance of the statement.)
Counsel for the plaintiff argues that inalienability prejudices creditors, discourages property improvements, encourages impermanence and instability by limiting the benefits but not the burdens of home ownership. I agree with him.
[*page131] [93] Cheshire in the above mentioned edition, cited two cases in support of the proposition quoted. The first of these were Muschamp v. Blue, [1617] J. Bridge 132. That involved a will in which it was provided that if the devisee sold the property other than to the son of the testator then the property should revert to such son. Of this condition the presiding judge
pronounced as follows:
“And as to the first, I conceive that the condition is void; for to restrain generally, and that he shall not alien to any but to J.S. is all one: for then the feoffee may restrain him from aliening to any except to himself, or such other person by name, whom he may well know cannot, nor never will, purchase the land: so that this condition shall take away all his power, and shall make a perpetuity in the feoffee, which is quite contrary to law. . . .”
The second case quoted by Cheshire was In Re Cockerill, [1929] 2 Ch. 131, where Eve, J., at page 135 stated as follows:
“The devisee in this case is not restrained from selling to a particular person, but from selling it to anybody but a particular person, and this, in my opinion, creates a state of facts not to be found in any reported case in which a condition imposing partial restraint has been treated as an exception to the general rule that the owner of property has as an incident of his ownership the right to sell and to receive the whole of the proceeds for his own benefit: see per Chitty J. in In re Elliot, [1896] Ch.
353, 356.”
The point is well made and needs no further comment.
The principle that a man who enters into a contract should be held to his bond has been frequently said with varying degrees of eloquence in many arguments and many cases.
This principle does not override certain principles developed by the courts of equity. For example contracts in restraint of trade will not be enforced if they are not reasonable, however willing the restrained party may have been to so contract.
As another example, provisions in an agreement prohibiting the alienation of land are void and the rigidity of this principle is not tempered by the willingness of the alienee [*page132] to be so restricted even though such restriction may be reasonable.
Courts called upon the adjudicate in disputes such as this ought not to be too quick to interpret an option or any other undertaking created or made by the grantee in a deed of conveyance in favour of the grantor as being anything other than what it purports to be.
The law on restraint on alienation was discussed by Judge Howland in Stephens v. Gulf Oil Canada Ltd. (1975), 11 O.R. (2d) 129. In it he appears to have divided restraints into two classifications — conditions and covenants. At page 157 of the cited report he said that it is often difficult to determine whether the provision imposing the restraint is a condition, which may be void if it is repugnant to the estate granted, or a covenant the breach of which may simply give rise to a right of action.
In examining this problem, it is useful to use the terms “conditions” and “covenants”. These
terms themselves each have sub-classifications.
Conditions may be ordinary conditions or conditions subsequent. In the context of alienation an ordinary condition would be one contained in a grant of land, which simply provided one way or another that the grantee was not to alienate the property; while a condition subsequent would purport to create in the title an element of defeasance and would provide in effect that, if the grantee or devisee alienated the property, then the title created by the instrument in which the condition subsequent was contained would be defeated and the property would revert to the testator or grantor or otherwise devolve in accordance with the provisions of that instrument.
A covenant (which is probably not adequate term for this purpose but which I will continue to use so as not to further encumber a complex problem with additional language) may be in the form of an option running with the land or it may be a preemptive right or other right in the nature of an option which is purely contractual and does not run with the land.
A simple distinction must be noted between condition and covenant, when these terms are used in this context. A condition is created by the testator or the grantor. A covenant is mad by the grantee.
[*page133] [105] The vast percentage of the case law on restraints on alienation involve the construction of wills. All such cases must necessarily constitute conditions because they are the creatures of the testator. The devisee has had no input and, however the condition may be expressed, whether in the form of an undisguised prohibition against alienation or in the form of an option or right of first refusal, if it amounts to a restraint on alienation whether absolute or substantial, it is void.
A condition of this nature in a grant is less likely to occur. However, it is in transactions inter vivos where condition comes into conflict with covenant. We are, of course, dealing with a total package. The grant and the conditions or covenants go together. The grantee cannot have one without giving the other.
In such circumstances is what appears to be a covenant in fact a condition? Here, strangely, we appear to be involved in a question of fact.
At this point, I must step back for the moment to discuss the Stephens case.
In that case an agreement was in issue in which mutual rights of first refusal had come into existence between an owner of property and another party who acquired an interest in part of that property.
The learned judge found that the right of first refusal was a covenant and not a condition but declared that it was void anyway, relying on propositions stated by Fratcher in his text on Perpetuities and Other Restraints (1954) and Schnebly in Restraints Upon the Alienation of Legal
Interests 44 Yale L.J. 961, 1186 and 1380 (1935).
He quoted extracts from each which I now repeat. Fratcher said:
“The Restatement of Property takes the position that a pre-emptive provision is a restraint on alienation. It asserts, nevertheless, that such a provision is valid if the optionee is required to meet any offer received by the optioner as a condition of exercising his option. If, however, the optionee need pay only a fixed price or a percentage of any offered price, the Restatement treats the provision as one governed by the general [*page134] rules as to restraints on alienation of estates in fee simple.”
Schnebly said:
“Any preemption exercisable at a fixed price is likely to involve sacrifice to the person bound to offer, since a fixed price is usually based upon the value of the land when the preemptive provision is executed. It might be held, therefore, that any preemptive provisions fixing a price without reference to future increase in value is void as a restraint upon alienation in substance. If the preemptioner must pay the offeror’s price, however, there is no material impediment to alienation. A preemptive provisions of this type might be enforced in so far as the rule against restraints upon alienation is concerned.”
No case law was quoted as authority for these propositions.
Toy, J., in B.C. Forest Products v. Gay et ux., [1976] B.C.L.R. 265, criticized Judge Howland’s find on the basis that the court was applying a real property concept to a contractual issue.
The Gay case involved a situation not unlike the present case. In the conveyance, there was a repurchase agreement. There were features of it that made it significantly less harsh than the repurchase rights in this case.
Judge Toy, unable to find cases that provided that repurchase rights and options are void as restraints, found that the granting of an option or right of first refusal is the first step in the process of alienation. That finding will undoubtedly be quoted in other decisions. The only caveat I would enter is that, while it is true of an option, it is not true of a repurchase right or a right of first refusal, which are not steps in the process of alienation but provisions merely descriptive of situations when the right to require alienation comes into existence.
Despite the finding in the Stephens case, I would be reluctant to find that an option or a right of first refusal granted by the owner of land after and not in connection with the acquisition of title is invalid notwithstanding that it prescribes a fixed price or a price that when calculated by formula produces a below market figure. The comment of [*page135] Fratcher and Schnebly referred to above probably originates in those cases dealing with the subject insofar as consideration was being
given to a condition imposed in a will.
The cases frequently quoted on that subject are Re Rosher (1884), 26 Ch. D. 801, and Re Cockerill, [1929] 2 Ch. 131. Both of those cases involved optional or preemptive rights imposed by the testator in the devising of real estate. Both cases in holding that the conditions were void gave weight to the fact that the conditions required the sale at a price below market value.
As I said above, such provisions in wills must be conditions and not covenants because they are created by the testators.
A covenant in the nature of an option or a right of first refusal given independently and subsequently to the acquisition of title is clearly a covenant as I have used that term and ought not in my view be reviewable in accordance with the principles that were stated in Re Rosher and Re Cockerill.
Options and right of first refusal confine the potential market of the person granting such rights to one person and frequently limit the purchase price to the amount therein stated. By what principle can a court be justified in nullifying such rights? Is the court now to police options and rights of first refusal and pronounce that they must be reasonable both as to duration and price?
The court should not interfere with such rights where they stand separate and apart from the instrument under which title was acquired and are not in any way associated with the acquisition of title, unless the transaction is oppressive or unconscionable.
Where, however, the acquisition of title and the making of the covenants are linked together in such a manner as to indicate that there would not be one without the other, then I think the question of reasonableness comes into issue. That is why I said earlier that we are involved in a question of fact.
If the obligation entered into by the person acquiring title is reasonable as to time and price, then a court ought to consider it a covenant freely entered into by the grantee [*page136] as a business transaction.
If on the other hand the obligation is not reasonable as to time and price, then the court ought to consider it a condition imposed by the grantor on the grantee irrespective of the form in which the condition appears and that if it amounts to a restraint on alienation, then it is void.
In summary, repurchase rights contained in a conveyance or created immediately following the execution and delivery of a conveyance which are reasonable and in the nature of rights that the purchaser might have granted as part of an independent business transaction are covenants and the court will not interfere with them any more than if they had been created independently of the conveyance. Repurchase rights so contained or created which are not reasonable and in such nature are conditions and if they restrain alienation absolutely or substantially they are void.
The instrument or transaction must be looked at as a whole. Restraints on alienation that are disguised are no more valid than restraints that are obvious. Where they appear to be covenants made by the grantee, they may in fact be conditions created by the grantor.
In the B.C. Forest Products case judge Toy said as follows:
“I regard Re: Rosher and Re: Cockerill as authorities for the proposition that the courts will see through an attempt by a testator to accomplish indirectly what he cannot directly by interpreting as a substantial partial restraint on alienation that which the testator has worded as an option in favour of a third person on terms that are financially unattractive to the devisee.”
This comment strengthens my view that a grantor may not create a condition that is a restraint on alienation by disguising it as an option. That is why it is important to determine first whether there is a condition or a covenant and, if it is a condition, is it in restraint of alienation.
This now leads to consideration of the obligation entered into by the grantee. It was entered into simultaneously with the acquisition of title and if my reasoning is correct, then we must determine whether the provisions are reasonable.
[*page137] [131] For the plaintiff’s undertaking the defendant subsidized the original cost and the interest on the mortgage.
Despite the rather generous subsidization, I can hardly describe the plaintiff’s undertaking as a right which the grantee might have bestowed on the grantor for any other reason than because he had to acquire title. Although over a 30 year period (which was the life of the mortgage and probably approximately equal to the working life of the plaintiff) the subsidization by my calculations would have a capital value of $ 17,000.00, the selling price of the house would deplete by $ 15,000.00. While the plaintiff would still be ahead of the game on this calculation, he is denied the benefit of improving property values, if there is improvement, and the benefit of his own care and maintenance.
The third part of the plaintiff’s undertaking – the preemptive rights – reaches so far into the future as to fall completely outside the sphere of a bargain. I will deal with this later under the heading of oppression.
In the circumstance created by the plaintiff’s undertaking there can be no pride of ownership, no incentive to provide anything more than essential maintenance. What does it profit a man to own a home that he knows sooner or later he may be required to sell back to the previous owner at an ever reducing price?
I think that clearly the undertaking must be considered a condition. It is not the sort of undertaking a man would be expected to enter into unless that was the only way he could acquire title, notwithstanding the relatively generous subsidization which may perhaps be considered the
consideration for the plaintiff’s undertaking.
The plaintiff’s undertaking for practical purposes limits the market to one person for a formula price which bears no relationship to the market value. The condition endures for a lengthy period of time. It must necessarily amount to a substantial restraint on alienation. In this context, I agree with the principle stated by Fratcher and Schnebly and set forth above insofar as it is applied to conditions, even though I have questioned its application to covenants standing in complete isolation from the instrument of title. I would go further and extend it to repurchase rights generally.
[*page138] [137] In my view, options, repurchase rights, preemptive rights and the like which are in effect conditions of title and which purport to require the title holder to sell the land to the previous owner or someone designated by him at a price that must be calculated without reference to improved property values, and which are designed to endure for a long period, are substantial restraints on alienation and are void.
My finding therefor is that because the plaintiff’s undertaking is not the type of undertaking that he would reasonably enter into independently of his acquisition of title, it is not a covenant but rather a condition under which he acquired title and that that condition constitutes a restraint on alienation and is therefore void.
REMOTENESS OF VESTING.
This matter has already been considered under the question of perpetuities and requires no further comment.
ILLEGAL CONDITIONS SUBSEQUENT.
A condition subsequent is a condition that upon the occurrence or the non-occurrence of a particular event the interest to which the condition is appended shall be defeated. If the condition subsequent is framed as a limitation it is valid; if it is framed so as to defeat the title it is void.
Neither element is present here and the matter need not be considered further.
DEROGATION FROM GRANT.
This is really part of the law against inalienability and hardly needs to be discussed separately. The principle as I understand it is that you cannot take away with one hand what you have already given with the other. Therefore, you cannot give a fee simple title and at the same time create an illegal condition subsequent upon which that title is likely to be defeated or impose a condition that renders the land entirely or substantially inalienable. This matter had already been adequately discussed.
OPPRESSIVE AND UNCONSCIONABLE.
Argument in this case was submitted by brief. The [*page139] plaintiff in his brief did not discuss the question at all. Halsbury’s Laws of England (2nd Edition), Volume 15, pages 282-283, contains a statement of the law relating to this. The passage reads as follows:
“Courts of equity have undoubted jurisdiction to grant relief against every species of fraud, including cases where it may be apparent, from the intrinsic nature and subject of the bargain itself, that it was one which no man in his senses and not under delusion would make on the one hand, and no honest and fair man would accept on the other; in fact, an inequitable and unconscionable bargain.
The principle has now been extended to all cases in which the parties contracting do not meet on equal terms, and is not limited to expectant heirs, but applies to all persons under pressure without adequate protection, and the onus of supporting the transaction is thrown on the person benefiting. In determining whether the bargain is a hard one, the whole transaction has to be considered and not only the price.”
In O’Rorke v. Bolingbroke (1877), 2 App. Cas. 814, at page 823 the following passage appears: “It sufficiently appears that the principle on which equity originally proceeded to set aside such
transactions was for the protection of family property; but this principle being once established, the
court extended its aid to all cases in which the parties to a contract have not met upon equal terms. In ordinary cases each party to a bargain must take care of his own interest, and it will not be presumed that undue advantage or contrivance has been resorted to on either side; but in the case of the “expectant heir”, or of persons under pressure without adequate protection, and in the case of dealings with uneducated ignorant persons, the burthen of shewing the fairness of the transaction is thrown on the person who seeks to obtain the benefit of the contract.”
I think in modern times courts should be hesitant to apply this equitable doctrine except in the most obvious circumstances. Many legal and equitable doctrines and in fact many of our practices find their origin in the days when the majority of men were illiterate.
[*page140] [145] In modern times there is little, if any, illiteracy; although there are still a great many men who will act without wisdom, who act in haste to repent at leisure, who purchase today’s advantages with tomorrow’s disadvantages.
Notwithstanding that caveat, I entertain serious doubts that the plaintiff’s undertaking at least in part can survive the test of oppression.
I have found that the plaintiff’s undertaking was not of such a nature as to be considered covenants which a reasonable person would enter into of his own accord.
It ought not be concluded from this that the first two parts thereof – the repurchase rights upon ceasing employment or mortgage default – are oppressive or unconscionable. While in law
they run for the full perpetuity period, from a practical point of view they would probably not survive for more than 30 years. There was indirectly a substantial consideration paid for these rights in the form of subsidization.
I cannot consider the obligations which are the mirror of these rights to be oppressive or unconscionable.
My view of the third part of the plaintiff’s undertaking – the right of first refusal – is different. This even from a practical point of view can run the full perpetuity period which could be as along as 100 years. Before half this period had expired, the resale value of the house would have depleted to zero.
The combination of time and price makes the obligation oppressive. I hesitate to use the word “unconscionable”, but it borders on this too.
The evidence on housing conditions at the time was not clear. There was alternate housing available but at what prices or on what terms was not disclosed in the evidence.
The defendant offered housing at low cost with no down payment; the capital cost and mortgage interest was subsidized.
It made an economically attractive proposition to the unwary. The defendant bargained from a position of strength but not such absolute strength as to render the total promise extracted oppressive.
[*page141] [155] It is inconceivable to me however that the right of first refusal can be described in any other fashion.
Even if the defendant declined to exercise the first two parts of its repurchase rights, the third part could linger like a chronic disease long past the middle of the next century.
While most men strive to increase their financial strength as they grow older, the plaintiff and those in his position would be striving in vain for in each year that passed their property would decline in value whatever they did and whatever happened to market prices generally.
I find the preemptive repurchase right oppressive and void.
PREVIOUS CONDUCT.
The plaintiff seeks to set aside the conveyance on the basis that the defendant by its conduct is estopped from enforcing the plaintiff’s undertaking.
The conduct appears to consist of the policy statement of the defendant set forth in the early part of this judgment in which the company gave a gratuitous undertaking to resell a property to a
designated employee. This enabled the owner to obtain a cash consideration from the prospective purchaser which was actually a consideration being paid for the owner designating to the defendant that the property ought to be resold to the prospective purchaser.
In practice, as I outlined, a selling employee would resell to the company who would calculate the purchase price and remit the same to the selling owner. A new deed would then be made out to the purchaser.
I see no basis for an estoppel here. The defendant is acting absolutely consistently with the plaintiff’s undertaking in exercising its right of first refusal. Although it has gratuitously provided to the plaintiff a lever by which he could secure from a willing purchaser an amount of money over and above that which he would acquire from the company in an ordinary resale, such a provision does not adulterate the rights of the defendant; nor does it in practice repudiate them. There is in fact no change of practice; the defendant has given the plaintiff something to bargain with in dealing [*page142] with co-employees who might wish to buy the property.
Counsel for the plaintiff appears to me to have confused the true situation. This confusion apparently arises out of the fact that a standard form of agreement of sale is being used.
Such an agreement of sale is not appropriate to the circumstances. In actual fact the owner is not selling the house to the prospective purchaser; he is really selling to the prospective purchaser an undertaking that he will designate to the defendant the prospective purchaser’s name as the new owner. Even with this, of course, the buying employee has no assurance that the property will be resold to him although it would be obviously a perilous course of conduct on the part of the defendant to disregard such a designation.
That disposes of the matter. The plaintiff is entitled to a declaration that the plaintiff’s undertaking is void because
“(a) it constitutes a substantial restraint on alienation;
insofar as it constitutes an undertaking to sell to the defendant when a call is made of the defendant as guarantor of the first mortgage it is a clog on the equity of redemption; and
insofar as it constitutes a right of first refusal it is oppressive.”
The defendant’s counterclaim is dismissed. The plaintiff shall have his costs.
I perhaps may be permitted a few words in conclusion.
The plaintiff’s undertaking offends because of the combination of time and price. Except insofar as it is a clog on the equity, it might not be void if it was for a short time at a fixed price or a long time at market price (less, perhaps, the cost of subsidization) but where it is for a long time at a fixed price, it offends the principles of equity mentioned.
The letter of January 4, 1974, seems to recognize these problems at least in part. It is a gratuitous undertaking and, even if it had effect in law or equity, it provides nothing [*page143] more than bandaid treatment for a gaping wound.
The defendant deserves full marks for its housing program but would have been better advised to extract a little less than it did for its generosity.
The plaintiff argued the question of restraint of trade but this was not pleaded. The argument is interesting only because it reverses the traditional position. Normally, a party seeking to avoid such an agreement has contracted to stay out of a certain field of endeavour; in this case, it is argued, the plaintiff, if he leaves his field of endeavour may lose his house. The argument in my view does not merit consideration.
Judgment for plaintiff.
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