Supreme Court of Canada
Canadian Long Island Petroleums Ltd. et al. v. Irving
Industries Ltd., [1975] 2 S.C.R. 715
Date: 1974-10-11
Canadian Long
Island Petroleums Ltd. and Sadim Oil & Gas Co. Ltd. (Defendants) Appellants;
and
Irving Industries (Irving Wire Products Division)
Ltd. and Irving Industries (Foothills Steel Foundry
Division) Ltd. (Plaintiffs) Respondents.
1974: June 4, 5; 1974: October 11.
Present: Martland, Spence, Pigeon, Dickson
and de Grandpré JJ.
ON APPEAL FROM THE SUPREME COURT OF ALBERTA, APPELLATE DIVISION
Real property—Agreement between joint owners
governing operation and development of certain oil properties—Each party given
right of first refusal to acquire other party’s participating interest—Interest
in land not created—Rule against perpetuities not applicable—Entitlement to
decree of specific performance.
The second appellant (Sadim) and the
respondents (Irving) each held an undivided one‑half interest in certain
lands. Relations between the two companies were governed by an agreement dated
August 1, 1966. Clause 13 of the agreement provided, inter alia, that if
one of the parties (i.e., the respondents or Sadim) received an offer to
purchase that party’s interest in the lands, the other party would have the
opportunity to purchase the interest on the same terms in priority to the party
that originally made the offer. On November 5, 1970, Sadim offered to
sell its interest in the lands to the first appellant (Long Island) for a cash
consideration of $20,000. On the same date Long Island accepted the offer. Subsequently, Sadim advised the respondents of
the proposed sale and advised Long Island of the provisions of cl. 13. On December 4, 1970, the respondents purported to
exercise the right of first refusal. Irving’s letter of acceptance stated that payment of the purchase price of
$20,000 was to be made in full by December 31, 1970. Sadim subsequently
transferred its interest in the lands in question to Long
Island on January 5, 1971. The respondents then
commenced an action for specific performance. The action was successful at
trial, and, on appeal, the judgment of the trial judge was affirmed by the
Appellate Division. Appeals were then brought to this Court. The
[Page 716]
appellants’ submission, on the major issue to
be determined, was that cl. 13 gave to each of the parties an equitable
interest in the land which might not vest until after the period limited by the
rule against perpetuities and was, therefore, void.
Held: The
appeals should be dismissed.
Unlike an option to purchase land, which
gives the optionee an equitable interest in the land, the right conferred by
cl. 13 did not create property rights. Each party agreed that upon the
occurrence of a certain event, which was within its own control, the other
party would have a first right of purchase for a 30-day period. The clause was
part of an agreement between joint owners of a property, governing the
operation and development of it. In essence it was a negative covenant whereby
each party agreed not to substitute a third party as a joint owner with the
other, without permitting the other party the opportunity, by meeting the
proposed terms of sale, to acquire full ownership. An agreement which is
personal and which does not create an interest in land is not subject to the rule
against perpetuities.
Sadim, in breach of its commitment to the
respondents, conveyed its interest in the land to Long
Island, which took its title with full knowledge of
the requirements of the restrictive covenant. In equity the covenant bound Long
Island, and, accordingly, the respondents were entitled to the decree of
specific performance.
London and South Western Railway Co. v.
Gomm (1882), 20 Ch. D. 562; Frobisher Ltd.
v. Canadian Pipelines & Petroleums Ltd. et al., [1960] S.C.R. 126,
distinguished; Weber v. Texas Co. (1936), 83 F. 2d 807; Manchester
Ship Canal Co. v. Manchester Racecourse Co., [1901] 2 Ch. 37,
followed; Albay Realty Ltd. v. Dufferin-Lawrence Development Ltd. (1956),
2 D.L.R. (2d) 604, not followed; Murray v. Two Strokes Ltd., [1973] 3
All E.R. 357, referred to.
APPEALS from a judgment of the Supreme Court
of Alberta,
Appellate Division, affirming a judgment of Milvain C.J.T.D. Appeals dismissed.
[Page 717]
G.F. Dixon, for the defendant, appellant,
Canadian Long Island Petroleums Ltd.
J.M. Hope, Q.C., for the defendant,
appellant, Sadim Oil & Gas Co. Ltd.
J. Hopwood, for the plaintiffs,
respondents.
The judgment of the Court was delivered by
MARTLAND J.—These appeals are from a judgment of
the Appellate Division of the Supreme Court of Alberta, which affirmed the
judgment at trial, which had ordered and declared that upon payment of the sum
of $20,000, as provided in the judgment, the respondents were entitled to
specific performance of the agreement which was in issue at the trial.
The parties agreed as to the facts, and those
which are relevant to the appeals are stated in the reasons of Chief Justice
Milvain in his judgment at trial, which I will now set forth in the form in
which they were delivered.
“1. March 14th, 1966, a farmout agreement was
entered into between Decklab Petroleum Corporation, as farmor, and Glenwood
Development Corporation Ltd. as farmee. Under this agreement Glenwood acquired
or was able to acquire the interests now in question.
2. On August 1st, 1966, Glenwood having acquired
property interests under the foregoing agreement, entered into an agreement
with Sadim. This agreement contained the following recital:
‘Whereas the parties hereto each have an
undivided share or interest in certain lands (hereinafter called the Jointly
Held Lands) and desire to enter into an agreement for the joint operation and
development of the Jointly Held Lands.’
The agreement then went on to provide that
Glenwood would be the operator, and provided for the many and usual things one
finds
[Page 718]
in such agreements. Among these provisions we
find clause 13 as follows:
13. TRANSFERS, SALES AND ASSIGNMENTS:
If a party hereto (hereinafter in this
clause referred to as ‘the Selling Party’) receives a bona fide offer for all
or any portion of its Participating Interest which it is willing to accept, it
shall forthwith give to the Other Party (hereinafter in this clause referred to
as ‘the Non-Selling Party’) who has not received an offer, written notice of
the terms of the said offer together with the name and address of the offeror,
and the Non-Selling Party shall have the first right for a period of thirty
(30) days after written notice is so given to purchase such interest at the
price and on the terms set forth in the said offer. If the Non-Selling Party
does not elect to purchase such interest, the Selling Party shall be at
liberty, for a period of ninety (90) days following the date upon which the
said thirty (30) day notice period expires, to make such a sale to the offeror
upon terms not more favourable to the said offeror than were contained in the
said offer. The provisions of this clause relating to the obligation of the
Selling Party to offer all or any portion of its Participating Interest to the
Non-Selling Party shall not apply to mergers or consolidations or to
assignments or transfers between parent and subsidiary corporations or
subsidiaries of a parent company if the parent company owns at least fifty per
cent (50%) of the voting stock of the subsidiary corporation or corporations,
or between affiliated companies controlled by mutual parent companies, or to
the sale by the Selling Party of all its assets in Canada or to the granting of
security to any chartered bank in Canada pursuant to Section 82 of The Bank
Act. Should a party sell or otherwise dispose of less than its entire
Participating Interest hereunder or sell or otherwise dispose of its entire
Participating Interest to more than one person, the other party shall treat the
disposing party as the owner of the Participating Interest which it had prior
to the said disposition and shall not recognize or deal with the assignee(s) or
purchaser(s) until such time as a single assignee or single purchaser has
acquired the disposing party’s entire Participating Interest, at which time the
said single assignee or single purchaser shall be substituted for the disposing
party by executing and delivering to the other party a copy of this Agreement
and the
[Page 719]
assignee or purchaser shall thereupon be
subject to all the terms and conditions of this Agreement, including the terms
and conditions of this clause 13.
3. An agreement dated August 1st, 1967 was entered into between Irving
and Sadim.
This agreement recites the operating agreement
referred to above dated August 1st, 1966, and proceeds:
‘And whereas Glenwood has, with the consent
of Sadim, by agreement dated August 31st 1967 sold its entire interest in and to the said Jointly Held Lands to Irving.’
Here I wish to note, in parenthesis, that there
must be some error in the dates shown on the copies of the documents submitted
to me. How can an agreement dated August 31st, 1967 be referred to in a
document dated August 1st, 1967?
However, this agreement makes it clear that Irving should stand in the place of
Glenwood in the agreement of August 1st, 1966. In fact the agreement of August 1st, 1966 was annexed as Appendix “A”, and
it was provided in clause 4 as follows:
‘4. Subject to the provisions of clause 13
of appendix “A” this agreement shall enure to the benefit of and be binding
upon the parties hereto their respective successors and assigns.’
4. Prior to November 5th, 1970, discussions took
place between Sadim and Long Island, having in view a sale by Sadim to Long Island of its interest in
the ‘jointly held lands’.
5. On November 5th, 1970, Sadim wrote to Long
Island as follows:
‘November 5, 1970
Canadian
Long Island Petroleums Ltd.,
401 Lancaster Building,
CALGARY 2, Alberta.
[Page 720]
Attention: Mr. V. Bolin.
Dear Sirs:
|
Re:
|
Glenwood Sadim Pembina
Ltd. 2-27 BR-48-6-W. 5 M.
|
Further to recent discussions, this letter
will confirm that Sadim Oil & Gas Co. Ltd. is prepared to sell their entire
interest in the captioned well and spacing unit for a cash consideration of
$20,000.00.
The details of this prospect are as
follows:
Petroleum & Natural Gas Lease No.
116915 standing in the name of Dekalb Petroleum Corporation.
Sadim holds a 50% working interest in the
S.½ of 27-48-6-W.5 M. down to and including the Basal Belly River Sand.
The remaining 50% working interest is owned
by Irving Industries Limited who have the right to sub contract its duties as
Operator to Robert J. Sumner.
Dekalb Petroleum Corp. reserves a gross
overriding royalty on gas and oil equal to that due the Crown.
We enclose for your perusal copies of the
following documents:
1. Farmout agreement between Dekalb
Petroleum Corp. and Glenwood Development Corp. Ltd.
2. Assignment agreement between Glenwood
Development Corp. Ltd. and Sadim Oil and Gas Co. Ltd.
3. Memorandum of agreement between Irving
Industries Ltd. and Sadim Oil and Gas Co. Ltd.
This offer is subject to prior acceptance
and withdrawal without notice.
Yours
very truly,
SADIM OIL & GAS LTD.,
J.R.
Crawford,
Encl. Landman.
|
cc.
|
Mr. R.J.
Sumner,
|
|
|
10—600 Sixth Ave.
S.W.,
|
|
|
Calgary, Alberta.’
|
It should be noted at this moment that the
‘offer’, if that be what it is, comes from and not to Sadim. It is on this
basis the defendants contend the transaction between them does
[Page 721]
not fall within clause 13 of the operating
agreement.
6. On November 5th, 1970, Long Island wrote Sadim
as follows:
‘CANADIAN
LONG ISLAND PETROLEUMS LTD.
401 Lancaster Building—
Calgary 2, Canada
5th November, 1970.
Sadim
Oil & Gas Co. Ltd.,
5112—3rd Street S.E.,
P.O. Box 5520—Station ‘A’
Calgary 9, Alberta.
Dear Sirs,
|
Re:
|
Glenwood Sadim Pembina
LSD 2-27-BR-48-6-W.5th
Meridian
|
I refer to your letter of November 5th,
1970 and your offer to sell the above.
Our company hereby accepts your offer.
If you will have your usual transfer
documents delivered to our solicitors:—
Messrs. Macleod,
Dixon, Burns, Love, Leitch,
Lomas, Charters & Montgomery,
Barristers and Solicitors,
555—Bentall Building,
Calgary 2, Alberta.
for the attention of Mr. K.S. Dixon,
Q.C., we will proceed with completion in the usual way.
Yours
truly,
CANADIAN LONG ISLAND
PETROLEUMS LTD.
“Vincent Bolin”
VB:LL President.’
I feel it should be noted at this time
that, among the documents enclosed was included the agreement between Irving
and Sadim, to which was annexed as appendix “A” the Agreement between Glenwood
and Sadim containing much discussed clause 13.
7. On November 5th, 1970, Sadim wrote to Irving as follows:
[Page 722]
‘SADIM
OIL & GAS CO. LTD.
5112—3rd Street S.E.
P.O. Box 5520, Station ‘A’
CALGARY 9, Alberta
|
Irving Industries Ltd.,
125—66 Avenue S.E.,
CALGARY, Alberta.
|
November 5, 1970.
|
Attention: Mr. H.A. Irving
Dear Sirs:
|
Re:
|
Glenwood Sadim Pembina
Lsd. 2-27 BR-48-6-W.5 M.
|
We refer you to Memorandum of Agreement
dated August 1st, 1967, between Irving Industries (Irving Wire Products
Division) Ltd. and Irving Industries (Foothills Steel Foundry Division) Ltd.,
of the first part, and Sadim Oil & Gas Co. Ltd., of the second part,
concerning the captioned well and spacing unit.
In accordance with clause 13 of Appendix
“A” of the said agreement, you are hereby advised that Sadim Oil & Gas Co.
Ltd. has offered for sale to Canadian Long Island Petroleum Ltd., its entire
interest in the captioned property for a cash consideration of $20,000.00.
A copy of the letter outlining the details
of the offer is attached for your information.
Yours
very truly,
SADIM OIL & GAS CO. LTD.,
“J.R. Crawford”
Encl. J.R. Crawford,
REGISTER. Landman.’
There was enclosed, as stated, a copy of the
letter Sadim to Long Island, set out in Number 5 above.
8. On November 9th, 1970, Sadim wrote Long Island
as follows:
‘November 9, 1970
Canadian
Long Island Petroleums Ltd.,
401 Lancaster Building,
CALGARY 2, Alberta.
Attention Mr. V. Bolin.
Dear Sirs:
|
Re:
|
Glenwood Sadim Pembina
Lsd. 2-27-BR-6-W. 5 M.
|
With reference to your letter of November
5th and further to our recent conversation, we confirm that the Operator,
Irving Industries Ltd., has the option of first refusal on the captioned prop-
[Page 723]
erty. This is in accordance with clause 13
of Appendix “A” of Memorandum of Agreement dated August 1, 1967, a copy of
which was forwarded to you.
We will keep you advised of developments in
this matter.
Yours
very truly,
SADIM OIL & GAS CO. LTD.,
J.R. Crawford,
Landman.’
I think it should be noted that both Sadim and Long Island are now fully aware of clause
13.
9. On December 4th, 1970, Irving wrote Sadim as follows:
‘December 4th, 1970
Sadim
Oil and Gas Co. Ltd.,
5112—3rd Street S.E.
P.O. Box 5520, Stn. A
Calgary, Alberta.
Attention:
J.R. Crawford
Dear
Mr. Crawford:
|
Re:
|
Glenwood Sadim Pembina
LSD-2-27-BR-48-6-W-5.
|
With reference to your letter in regard to
the sale of a 50% interest in the subject oil well, we now advise you that we
will purchase the half interest which you have available for sale for
$20,000.00. Payment to be made in full by December 31st, 1970.
If you wish to discuss the matter further
please contact me at your convenience.
Yours
very truly,
IRVING INDUSTRIES (IRVING
WIRE PRODUCTS DIVISION) LTD.
Harry A. Irving
HAI/jm President’
It should be noted, in view of the agreement as
to issues referred to later, that this letter was attached as Exhibit 8 to the
agreed statement of facts. I think also it should be recognized that this
letter falls within the 30 day period mentioned in clause 13 of the operating
agreement.
[Page 724]
10. On December 16th, 1970, solicitors for Irving wrote Sadim as follows:
‘December 16th, 1970
K-25,371
Sadim
Oil and Gas Co. Ltd.,
5112—3rd Street S.E.,
P.O. Box 5520, Station A,
CALGARY, Alberta.
Attention:
Mr. J.R. Crawford
Dear
Sir:
|
Re:
|
Glenwood Sadim Pembina
Lsd. 2-27 BR-48-6 W5M
|
We are solicitors for Irving Industries
(Irving Wire Products Division) Ltd. and we refer to your letter of November 5, 1970 addressed to our client sent
pursuant to Clause 13 of the Operating Agreement of August 1, 1967. We also
refer to our client’s letter of December 4, 1970 advising that it was prepared to purchase the subject properties on
the basis outlined in your letter.
We would ask that you arrange to have your
solicitors prepare the required conveyancing documents and forward the same to
this office for execution by our client. We would also appreciate your advice
as to where you wish the purchase monies of $20,000.00 to be deposited. Your
earliest attention and reply would be appreciated.
EFM/mr Very
truly yours,
cc.
Mr. H. Irving E.F.
McRory’
11. On December 28th, solicitors for Irving
wrote Sadim as follows:
‘December
28th, 1970
K-25,371
Sadim
Oil and Gas Co. Ltd.,
5112-3rd Street S.E.,
P.O. Box 5520, Station A,
CALGARY, Alberta
Attention:
Mr. J.R. Crawford
Dear
Sir:
|
Re:
|
Glenwood Sadim Pembina Lsd. 2-27
BR-48-6 W5M
|
Reference is made to our letter of December
16th, 1970 with reference to the sale of the subject properties to Irving
Industries (Irving
[Page 725]
Wire Products Division) Ltd. To date we do
not appear to have received an acknowledgement or reply to our letter. In view
of the fact that our client would prefer to have this transaction go through
prior to December 31, 1970, your earliest attention and reply is solicited.
Very
truly yours,
EFM/mr E.F.
McRORY’
12. By agreements dated January 5th, 1971, Sadim
assigned to Long Island its entire interest in the ‘Jointly Held Lands’ in
Consideration of $20,000.00 which was paid.
13. The parties agree that Long Island is in a
position to convey to Irving in the event it be determined the plaintiffs are
entitled to specific performance.
Finally, the parties in their agreed statement
of facts define the points in issue by means of paragraphs 14 and 15, in terms
as follows:
‘14. POINTS IN ISSUE
There are three main points in issue in
these proceedings for determination by this Honourable Court:
(a) Does Clause 13 of Exhibit 1 offend the
rule against perpetuities in which case such clause is of no force and effect
whatsoever;
(b) If Clause 13 does not offend the rule
against perpetuities then is the said clause applicable in any event under the
circumstances of this case;
(c) Was the letter Exhibit 8 notice to
purchase at the same price and terms of the purchase by Long Island so as to
comply with the requirements of Clause 13 of Exhibit 1.
15. In the event that it is found that the
rule against perpetuities is not offended by Clause 13 of Exhibit 1, and the
said Clause 13 is applicable to the circumstances of this case, and in the
event the said letter Exhibit 8 does comply with the requirements of Clause 13
of Exhibit 1, then are the Plaintiffs entitled to an Order for specific
[Page 726]
performance conveying the entire interest
formerly owned by Sadim to the Plaintiffs in return for the sum of $20,000.00
and in the event the Defendants are unable to convey the said working interest
then a Direction that there be trial of an issue as to the damage sustained by
the Plaintiffs as a result of such non-conveyance.’”
Counsel for the respondents was advised at the
conclusion of the argument submitted by counsel for the appellants that we did
not need to hear further argument respecting the issues defined in paragraphs
(b) and (c). We were all in agreement with the views expressed by the trial
judge and the majority of the Appellate Division with respect to those points.
The major question, which remains to be
determined, is as to whether the provisions of cl. 13 offend against the
rule against perpetuities.
In considering the application of the rule
against perpetuities in the circumstances of the present case it is useful to
consider its background. The history of the rule is outlined in Cheshire’s Modern Real Property, 10th
ed., at pp. 234 and 235, as follows:
The history of the rules whereby settlors
have been prevented from limiting remote interests, is the history of a
conflict between two antagonistic ideas. On the one hand there is the desire of
the man of means to regulate the future enjoyment of his property for as long a
period as possible. The right of making a settlement or a will is a potent
weapon in the hands of a declining man, and unless human nature is transformed,
the opportunity it offers of fixing the pecuniary destinies of the coming
generations will not be neglected. A landowner, unless he gives thought to the
fiscal consequences, is not always content to leave a large estate at the free
disposal of a son. Old age especially, satisfied with its own achievements and
often irritated by the apparent follies of a degenerate time, is inclined to
restrain each generation of beneficiaries within close limits, and to provide
for a series of limited interests. A landowner views the free power of
alienation with complacency when it resides in his own hand, but he does not
feel the same equanimity with regard to its transfer to others.
[Page 727]
“But the freedom of alienation and devise
was not congenial to the spirit in which great landowners viewed their land. To
preserve their family name and position, ‘to keep the land in the family,’
seemed to them a desirable and even laudable object, to restrain any individual
holder of the land from dealing with it so as to interfere with the interest of
subsequent generations of the family in the family land was a necessary means
to this end. To contrive restraints on alienation and succession which the law
would enforce, to ascertain the furthest limits up to which the law would allow
the grasp of the dead hand to be kept on the hand of the living, was the task
set by the great landowners before their legal advisers.” (Scrutton, Land in
Fetters, p. 108.)
This aspiration, however, soon aroused the
antagonism of the courts. The law is moved, and from the earliest times always
has been moved, by a deep-seated antipathy to this human love of power. It is
one thing to permit the free power of alienation, another to allow it to be
exercised to its own destruction. The view of the law is that no disposition
should be allowed which tends to withdraw land from commerce, and in pursuance
of this policy two rules have emerged which have successfully prevented the
particular evil of “perpetuities,” though they are essentially different from
each other in nature. The first, directed against inalienable interests and
often called the old rule against perpetuities, forbids the creation of
any form of unbarrable entail; the second, the modern rule against
perpetuities, invalidates an interest that may vest at too remote a date in
the future.
The perpetuity period is defined by Cheshire at p. 240:
At common law, the vesting of an interest
may be postponed during the lives of persons in being at the time when the
instrument of creation takes effect, plus a further period of twenty-one years
after the extinction of the last life. Any interest so limited that it may
possibly vest after the expiration of this period is totally void.
[Page 728]
The question to be determined is as to the
applicability of this rule, which is not a statutory provision, but was created
judicially, in the circumstances of this case.
The statement of facts refers to a farmout
agreement. Decklab Petroleum Corporation was lessee under a petroleum and
natural gas lease from the Crown. By its agreement with Glenwood Development
Corporation Ltd., in consideration of a covenant for a gross overriding royalty
payable by Glenwood to Decklab, Glenwood was given the right to acquire, by the
drilling of one or more wells on the leased lands, the rights of Decklab under
the lease in one or more quarter sections of land out of the
section of land which was the subject-matter of the lease. Glenwood did
earn the rights which are involved in this case.
Having acquired such rights, Glenwood made the
agreement dated August 1, 1966,
whereby the appellant Sadim became the owner of an undivided share or interest
in the lands in question. That agreement commenced with the following recital:
WHEREAS the parties hereto each have an
undivided share or interest in certain lands (hereinafter called “the Jointly
Held Lands”) and desire to enter into an agreement for the joint operation and
development of the Jointly Held Lands;
This agreement was one which governed the joint
operation and development of certain oil properties. Clause 13, which is the
important clause under consideration in this case, was a part of that
agreement. It was one of the conditions governing the joint ownership of the
property. It was designed to protect the desire of each of the joint owners
that it should not be forced into a joint ownership with another party against
its will.
The respondents Irving became successors to
Glenwood, with the assent of Sadim. Irving and Sadim were parties to an
agreement dated August 1, 1967. The agreement of August 1, 1966, above mentioned, was
incorporated into and became a part of the later agreement.
[Page 729]
The submission of the appellants is that
cl. 13 gave to each of the parties an equitable interest in the land which
might not vest until after the period limited by the rule against perpetuities
and was, therefore, void. Reliance was placed on the judgment of the English
Court of Appeal in London and South Western Railway Co. v. Gomm, and on the judgment of this Court in Frobisher
Ltd. v. Canadian Pipelines & Petroleums Ltd. et al.
The Gomm case involved an indenture dated
August 10, 1865, between the London and South Western Railway Company and
George Powell, by which the railway company conveyed to Powell a parcel of land
no longer required for the purposes of the railway. Powell, for himself, his
heirs, executors, administrators and assigns, covenanted with the railway
company, its successors and assigns, that he, his heirs and assigns, owner and
owners for the time being of the lands intended to be conveyed, and all persons
who should or might be interested, should, at any time thereafter, whenever the
land might be required for the railway or works of the company, whenever
requested by the company, its successors or assigns, by six months’ previous
written notice and on payment of £100, reconvey the land.
In 1879 Powell sold the lands to Gomm, who had
full notice of the contents of the deed of 1865. Notice was given by the
railway company to Gomm on March 12, 1880, claiming to repurchase. Gomm refused
to reconvey and the railway company sued for specific performance of the
covenant in the deed.
The case was first heard by Kay J., who held
that the covenant did not create any estate or interest in land and, therefore,
was not obnoxious to the rule against perpetuities. He held that
[Page 730]
Gomm was bound by the covenant in the deed on
the principle of Tulk v. Moxhay.
On appeal it was held that the covenant gave to
the railway company an executory interest in land, to arise on an event which
might occur after the period allowed by the rules as to remoteness, and was
invalid.
Jessel M.R., at p. 580, after referring to
the covenant giving the right of repurchase, said:
If then the rule as to remoteness applies
to a covenant of this nature, this covenant clearly is bad as extending beyond
the period allowed by the rule. Whether the rule applies or not depends upon
this as it appears to me, does or does not the covenant give an interest in the
land? If it is a bare or mere personal contract it is of course not obnoxious
to the rule, but in that case it is impossible to see how the present Appellant
can be bound. He did not enter into the contract, but is only a purchaser from
Powell who did. If it is a mere personal contract it cannot be enforced against
the assignee. Therefore the company must admit that it somehow binds the land.
But if it binds the land it creates an equitable interest in the land. The
right to call for a conveyance of the land is an equitable interest or
equitable estate. In the ordinary case of a contract for purchase there is no
doubt about this, and an option for repurchase is not different in its nature.
A person exercising the option has to do two things, he has to give notice of
his intention to purchase, and to pay the purchase-money; but as far as the man
who is liable to convey is concerned, his estate or interest is taken away from
him without his consent, and the right to take it away being vested in another,
the covenant giving the option must give that other an interest in the land.
The Frobisher case was not concerned with
the application of the rule against perpetuities, but was concerned with the
question as to whether an option to purchase certain mining claims in
Saskatchewan created an interest in those claims. Regulations enacted pursuant
to the Saskatchewan Mineral Resources Act, R.S.S. 1953, c. 47, provided
that no person or
[Page 731]
company not a holder of a licence could acquire
any mineral claim or any right or interest therein. The optionee did not have
such a licence when the option was obtained.
The majority of this Court followed the Gomm case
to hold that the option did create an interest in the mining claims.
Judson J., at p. 169, said:
Does an option to purchase land give rise
to an equitable interest in land? The question has usually been considered in
connection with conveyances and leases and the rule against perpetuities, and
it has been held that the option is too remote if it can be exercised beyond
the perpetuity period. The underlying theory is that the option to purchase
land does create an equitable interest because it is specifically enforceable.
There is a right to have the option held open and this is similar to the right
that arises when a purchaser under a firm contract may call for a conveyance.
In both cases there is an equitable interest but in the case of the option it
is a contingent one, the contingency being the election to exercise the option.
The rationale for the conclusions reached in
these cases is, I think, accurately stated in a passage from Morris and Leach, The
Rule Against Perpetuities, 2nd ed., p. 219:
The reasoning by which this result was
reached was as follows. An option to purchase land is specifically enforceable.
This gives the optionholder an equitable interest in the land; this interest is
contingent upon his election to exercise the option. Contingent interests in
land are void unless they must vest (if at all) within the perpetuity period.
Therefore, an option to purchase which may be exercised beyond the perpetuity
period is void to the extent that it creates an interest in land.
In my opinion this reasoning is not applicable
to the right of first refusal provided for in cl. 13.
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. As Jessel M.R. puts it in the
passage previously cited:
[Page 732]
…but as far as the man who is liable to
convey is concerned, his estate or interest is taken away from him without his
consent, and the right to take it away being vested in another, the convenant
giving the option must give that other an interest in the land.
In other words, 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.
Clause 13 did not give to the respondents any
present right to require in the future a conveyance of Sadim’s undivided
one-half interest in the land. It was not specifically enforceable at the time
the agreement was executed. The respondents were not given any right to take
away Sadim’s interest without its consent. Their right under that clause was a
contractual right, i.e., the covenant of Sadim that if it was prepared
to accept an offer to sell its interest, the respondents would then, and only
then, have a 30-day option to purchase on the same terms. The contingency in
this clause is resolved solely upon the decision of Sadim to sell.
I am in agreement with the views expressed in a
judgment of the Circuit Court of Appeal, Fifth Circuit, by Strum, District
Judge, in the case of Weber v. Texas Co.,
at p. 808:
The rule against perpetuities springs from
considerations of public policy. The underlying reason for and purpose of the
rule is to avoid fettering real property with future interests dependent upon
contingencies unduly remote which isolate the property and exclude it from
commerce and development for long periods of time, thus working an indirect
restraint upon alienation, which is regarded at common law as a public evil.
He then cites a number of authorities for this
proposition including the Gomm case, supra. He goes on to say:
The option (it was in fact a right of first
refusal) under consideration is within neither the purpose of nor the reason
for the rule. This is not an exclusive
[Page 733]
option to the lessee to buy at a fixed price
which may be exercised at some remote time beyond the limit of the rule against
perpetuities, meanwhile forestalling alienation. The option simply gives the
lessee the prior right to take the lessor’s royalty interest at the same price
the lessor could secure from another purchaser whenever the lessor desires to
sell. It amounts to no more than a continuing and preferred right to buy at the
market price whenever the lessor desires to sell. This does not restrain free
alienation by the right to buy. The lessee cannot prevent a sale. His sole
right is to accept or reject as a preferred purchaser when the lessor is ready
to sell. The option is therefore not objectionable as a perpetuity.
The question as to whether a right of first
refusal constituted an interest in land was considered by the English Court of
Appeal in Manchester Ship Canal Co. v. Manchester Racecourse Co. the Court had to consider a
provision in an agreement between these two companies which read, in part, as
follows:
3. If and whenever the lands and
hereditaments belonging to the racecourse company, and now used as a
racecourse, shall cease to be used as a racecourse, or should the aforesaid
lands and hereditaments be at any time proposed to be used for dock purposes,
then and in either of such cases the racecourse company shall give to the canal
company the first refusal of the aforesaid land and hereditaments en bloc…
This agreement was scheduled to an Act of
Parliament, which declared it to be valid and binding upon the parties thereto.
The racecourse company had offered to sell the
lands in question to the canal company for £350,000. At that time the
racecourse company already had an offer to purchase from the Trafford Park
Company, which wished to use the land for dock purposes, for £250,000. The
canal company offered £200,000, which was not accepted, and the racecourse
company later sold the land to the Trafford Park Company for £280,000. The
latter company had knowledge of
[Page 734]
the provision in question and agreed to
indemnify the racecourse company in respect of any claim under that clause.
Farwell J., at the trial, held that the
racecourse company could not sell the racecourse without offering it to the
canal company at the actual price offered by the Trafford Park Company. He held,
on the authority of London and South Western Railway Co. v. Gomm, supra, that
the right of first refusal gave the canal company an interest in the land which
could be enforced by it against the Trafford Park Company.
The Court of Appeal held that the clause did not
create any interest in the land in the canal company. This decision did not
lead the Court to the conclusion stated by Jessel M.R. in the Gomm case,
that, in the absence of its having an interest in land, the canal company had
no right which could be enforced against the Trafford Park Company. It was held
that the clause involved a negative covenant whereby the racecourse company
agreed not to part with the racecourse to anyone else without giving the canal
company first refusal and that, consequently, the clause could be enforced as
against the Trafford Park Company by the canal company within the principle of Lumley
v. Wagner.
The Gomm case was not specifically
mentioned in the judgment of the Court of Appeal, but it had been relied upon
in the judgment at trial and had been cited in argument before the Court of
Appeal. The judgment of that Court was a reserved judgment. In view of this it
seems clear that the Court of Appeal was of the opinion that the reasoning in
the Gomm case, relating to an option, was not applicable to the clause
under consideration giving a right of first refusal.
Goulding J., in the recent case of Murray v.
Two Strokes Ltd., based
his decision on the
[Page 735]
Manchester case
and says (at p. 361) that: “It has not been suggested that there is any
subsequent authority or statute which weakens the force of what Vaughan
Williams L.J. said.” Vaughan Williams L.J. delivered the judgment of the Court.
Counsel for the appellants relied upon the
decision in Albay Realty Ltd. v. Dufferin‑Lawrence Development Ltd., which involved an agreement giving a right
of first refusal. This is an oral judgment delivered at trial. The main ground
of decision was not concerned with the rule against perpetuities, which matter
is dealt with, very briefly as an additional ground of decision, at the end of
the judgment. Reliance was placed on Gomm, but the Manchester case
was not mentioned. The right of first refusal is referred to as “the right or
option”, and it would appear clear that any differentiation between them was
not argued.
In my opinion the right conferred by cl. 13
of the agreement in question here did not create property rights. Each party
agreed that upon the occurrence of a certain event, which was within its own
control, the other party would have a first right of purchase for a 30-day
period. As mentioned previously, the clause is a part of an agreement between
joint owners of a property, governing the operation and development of it. In
essence it is a negative covenant whereby each party agrees not to substitute a
third party as a joint owner with the other, without permitting the other party
the opportunity, by meeting the proposed terms of sale, to acquire full
ownership.
An agreement which is personal and which does
not create an interest in land is not subject to the rule against perpetuities.
As Cheshire says (Modern Real Property, 10th ed., at p. 258):
It is settled beyond argument that an
agreement merely personal, not creating any interest in land, is not within the
rule against perpetuities. Therefore, it
[Page 736]
is not void simply because the obligation
it creates may last for an indefinite time.
For the foregoing reasons it is my opinion that
the rule against perpetuities has no application to the circumstances of this
case.
The remaining issue to be determined is as to
whether the respondents are entitled to the decree of specific performance
which was granted at trial and sustained on appeal by the Appellate Division.
The position of the appellants is that Sadim has
disposed of its undivided half interest in the land to Long Island and that the
latter was not a party to the agreement containing cl. 13. It is contended
that, if the respondents did not have a property interest in the property
acquired by Long Island, they have no rights enforceable as against Long
Island.
As I have already indicated, the provisions of
cl. 13 involve a negative covenant not to part with Sadim’s interest in
the land to any other person without giving a first right of refusal to the
respondents. This was a restrictive covenant given to the respondents for the
benefit of their undivided one-half interest in the land. In equity the
covenant bound the appellant Long Island unless it could establish, as clearly
on the evidence it could not, that it had obtained title without notice of the
covenant.
If the respondents had sought an injunction to
prevent Sadim from disposing of the land they would, on the authority of the Manchester
case, have been entitled to it and the order would bind Long Island. The
following passage from the reasons for judgment in the Manchester case
is applicable here:
It seems, however, from the decision in Willmott
v. Barber ((1880) 15 Ch. D. 96) that the Trafford Park Company could
not obtain a decree for specific performance of a contract for sale and
purchase of land, if that sale would be a breach of a prior contract with a
third person; and it seems to us to follow that one ought to treat this case on
the basis of an action to restrain a breach of a contract threatened to be
[Page 737]
carried out in pursuance of a subsequent
contract by the defendant with a third person having full knowledge of the
first contract. This seems to bring the case within the principle of Lumley
v. Wagner [supra]. The contract here to give the canal company the
“first refusal” involves a negative contract not to part with the land to any
other company or person without giving that first refusal. If the action had
been brought against the racecourse company, the party to the contract, alone, the
injuction asked for could not have been granted without affecting the rights
and interests of the Trafford Park Company. They are necessary parties to the
action, just as Mr. Gye was a necessary party to the action of Lumley
v. Wagner, for to grant the injunction in that case was to prevent Miss
Wagner from carrying out her contract to sing at Mr. Gye’s opera-house;
and, if the defendant, thus brought in, comes and insists on his right to have
the second contract carried out, we do not see why the injunction should not be
granted against him.
In this case Sadim did convey its interest in
the land to Long Island, which took its title with full knowledge of the
requirements of the restrictive covenant. This being so, I do not consider that
the position of Long Island as against the respondents should be improved
because Sadim had actually acted in breach of its commitment to the
respondents, by assigning its interest to Canadian Long Island. This is a
proper case for the application of the proposition stated in Fry on Specific
Performance, 6th ed., p. 90:
§ 205. Generally a stranger to the contract
is not a proper defendant to an action for enforcing it. But this general rule
is subject to exceptions.
§ 206. If a stranger to the contract gets
possession of the subject-matter of the contract with notice of it, he is or
may be liable to be made a party to an action for specific performance of the
contract upon the equitable ground of his conscience being affected by the
notice.
I would dismiss the appeals with costs.
Appeals dismissed with costs.
[Page 738]
Solicitors for the defendant, appellant,
Canadian Long Island Petroleums Ltd.: Macleod, Dixon, Burns, Love &
Montgomery, Calgary. J
Solicitors for the defendant, appellant,
Sadim Oil & Gas Co. Ltd.: Milner & Steer, Edmonton.
Solicitors for the plaintiffs,
respondents: Howard, Moore, Dixon, Mackie & Forsyth, Calgary.
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