Supreme Court of Canada
Canadian Long Island Petroleums Ltd. et al. v. Irving Industries Ltd.,  2 S.C.R. 715
Canadian Long Island Petroleums Ltd. and Sadim Oil & Gas Co. Ltd. (Defendants) Appellants;
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the other party would have the opportunity to purchase the interest on the same terms in priority to the party that originally made the offer.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
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.,  S.C.R. 126, distinguished; Weber v. Texas Co. (1936), 83 F. 2d 807; Manchester Ship Canal Co. v. Manchester Racecourse Co.,  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.,  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.
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
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
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.
Attention: Mr. V. Bolin.
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.,
Mr. R.J. Sumner,
10—600 Sixth Ave. S.W.,
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
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.
Glenwood Sadim Pembina
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,
Calgary 2, Alberta.
for the attention of Mr. K.S. Dixon, Q.C., we will proceed with completion in the usual way.
CANADIAN LONG ISLAND
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:
‘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.,
November 5, 1970.
Attention: Mr. H.A. Irving
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.,
Encl. J.R. Crawford,
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.
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-
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.,
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
Attention: J.R. Crawford
Dear Mr. Crawford:
Glenwood Sadim Pembina
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
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.
10. On December 16th, 1970, solicitors for Irving wrote Sadim as follows:
‘December 16th, 1970
Sadim Oil and Gas Co. Ltd.,
5112—3rd Street S.E.,
P.O. Box 5520, Station A,
Attention: Mr. J.R. Crawford
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
Sadim Oil and Gas Co. Ltd.,
5112-3rd Street S.E.,
P.O. Box 5520, Station A,
Attention: Mr. J.R. Crawford
Glenwood Sadim Pembina Lsd. 2-27
Reference is made to our letter of December 16th, 1970 with reference to the sale of the subject properties to Irving Industries (Irving
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
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.
“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.
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.
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
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
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:
…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
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
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
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
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
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.
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.