Hongkong Bank of Canada v. Wheeler Holdings Ltd.

Hongkong Bank of Canada v. Wheeler Holdings Ltd.
Collection
Supreme Court Judgments
Date
1993-01-21
Report
[1993] 1 SCR 167
Case number
22268
Judges
La Forest, Gérard V.; L'Heureux-Dubé, Claire; Sopinka, John; Gonthier, Charles Doherty; Cory, Peter deCarteret; Stevenson, William; Iacobucci, Frank
On appeal from
Alberta
Subjects
Commercial law
Priorities and hypothecs
Notes
SCC Case Information: 22268
Decision Content
Hongkong Bank of Canada v. Wheeler Holdings Ltd., [1993] 1 S.C.R. 167
Canada Mortgage and Housing Corporation Appellant
v.
Hongkong Bank of Canada Respondent
and
Wheeler Holdings Ltd., Town House Development
Ltd., Wellington Housing Developments Ltd.,
Kate Wheeler, Pamela K. Wheeler, George L. Wheeler,
Lois Anderson, Patricia May Kirk, 375069 Alberta Ltd.,
386360 Alberta Ltd. and 376491 Alberta Ltd. Respondents
and
The Attorney General of Quebec Intervener
and between
Canada Mortgage and Housing Corporation Appellant
v.
375069 Alberta Ltd. Respondent
and
Town House Development Ltd. Respondent
and
The Attorney General of Quebec Intervener
and between
Canada Mortgage and Housing Corporation Appellant
v.
386360 Alberta Ltd. Respondent
and
Wellington Housing Developments Ltd. Respondent
and
The Attorney General of Quebec Intervener
Indexed as: Hongkong Bank of Canada v. Wheeler Holdings Ltd.
File No.: 22268.
1992: February 4; 1993: January 21.
Present: La Forest, L'Heureux‑Dubé, Sopinka, Gonthier, Cory, Stevenson* and Iacobucci JJ.
on appeal from the court of appeal for alberta
Mortgages ‑‑ Conditions -- CMHC lending money to "limited dividend" housing companies for construction and management of low-rental housing projects -- Operating agreements prohibiting subsequent sale or mortgage of projects without CMHC's approval as mandated by statute -- Operating agreements incorporated as part of mortgages -- Second mortgages incurred and sales effected without CMHC's approval ‑‑ Whether CMHC can impeach subsequent mortgages and sales on basis of statutorily mandated contractual terms prohibiting sale or disposition of projects ‑‑ Whether equitable "clean hands" doctrine applicable ‑‑ Whether second mortgages and sales illegal contracts ‑‑ Whether purchasers had right to redeem projects on payment of amounts outstanding under first mortgages ‑‑ National Housing Act , 1954, S.C. 1953-54, c. 23, s. 16(4)(g), (h).
Corporations ‑‑ Powers -- Corporate objects stipulating that companies to build and manage low‑rental housing projects ‑‑ CMHC lending companies money for construction and management of projects -- Operating agreements prohibiting subsequent sale or mortgage of projects without CMHC's approval as mandated by statute -- Operating agreements incorporated as part of mortgages
-- Second mortgages incurred and sales effected without CMHC's approval ‑‑ Whether second mortgages ultra vires companies' powers -- Whether corporate vires doctrine applicable -- National Housing Act , 1954, S.C. 1953-54, c. 23, s. 16 -- Companies Act, R.S.A. 1980, c. C-20, s. 20(1)(h).
Respondents Town House and Wellington were "limited‑dividend" companies statutorily described as being incorporated to hold and manage low‑rental housing and subject to a restriction in their charters to a maximum annual dividend. CHMC loaned both money to build and operate low-rental housing for a forty‑year term starting on the completion date. The mortgages provided that their terms were in addition to those granted or implied by statute and that they were made pursuant to the National Housing Act . Both companies entered into operating agreements with CMHC that prohibited the mortgage or sale of the projects without CMHC approval. The mortgages adopt the terms of the operating agreements as part of the mortgage and stipulated that breach of the operating agreements constituted breach of the mortgages.
A loan made by the Bank of British Columbia to Town House and Wellington, along with the respondent Wheeler Holdings, was secured by second mortgages on the projects and was personally guaranteed by the personal respondents. CMHC did not consent to the second mortgages. This mortgage was among the assets purchased by the respondent Hongkong Bank of Canada ("Hongkong") from the Bank of British Columbia in 1986.
In 1988, Town House and Wellington agreed to sell the projects ("1988 sales") to the respondents 375069 Alberta Ltd. and 386360 Alberta Ltd. ("1988 purchasers"). The 1988 sale agreements provided that title would be given to the 1988 purchasers free and clear of obligations under the CMHC operating agreements, and provided for liquidated damages if such title could not be given. These sale agreements also contained a provision expressly negating and rejecting the covenants implied by s. 62(1) of the Alberta Land Titles Act with the result that the transferees did not assume the obligations under the mortgage.
In 1989, Hongkong began an action to foreclose on its second mortgages. Hongkong proposed a judicial sale of the projects ("1989 sale") to yet another numbered company ‑‑ 376491 Alberta Ltd. ("1989 purchaser") ‑‑ owned by owner of the other two numbered companies. The 1989 sale agreement provided that the 1989 purchaser would get title subject to the CMHC mortgages but free and clear of the terms of the CMHC operating agreements.
Hongkong sought approval of the 1989 sale from the Alberta Court of Queen's Bench, but a Master refused this approval. Hongkong appealed this finding to a chambers judge, and the 1988 purchasers commenced an action seeking a declaration that they were owners of the projects under the 1988 sale agreements and that they were not bound by the CMHC operating agreements. The appeal and the actions were heard together by the chambers judge. The 1989 sale was approved by the chambers judge and the 1988 purchasers were granted the declaration they requested. Appeals were launched by CMHC in respect of each proceeding. CMHC's appeal to the Alberta Court of Appeal was dismissed. The main issue here was whether the appellant mortgagee can successfully impeach a subsequent mortgage and sale on the basis of statutorily mandated contractual terms prohibiting a sale or disposition of the mortgaged property. Issues arose as to the applicability of the equitable "clean hands" doctrine, the alleged illegality of the second mortgages and the 1988 and 1989 sales, the vires of the corporate powers of Town House and Wellington, and the 1988 purchasers' right to redeem the properties on payment of the amounts outstanding under the first mortgages.
Held: The appeal is allowed in part.
Town House and Wellington, by granting the second mortgage to the Bank of British Columbia and by selling the projects flagrantly breached their contracts with CMHC. Neither, however, sought relief here. The remedies sought by the other respondents do not constitute equitable relief in every case or there was insufficient evidence before the Court to conclude that these respondents had unclean hands. There is accordingly no equitable ground upon which to deny relief to the respondents.
In determining whether the respondents are entitled to equitable relief, all the respondents should not be painted with the same brush. An entire transaction does not become tainted merely because certain parties to the transaction may have unclean hands. It is necessary to show that the respondents actually seeking relief from the court are in fact seeking equitable relief and are guilty of wrongdoing amounting to unclean hands.
Even if the remedy of declaratory relief is seen to be sui generis, equitable principles such as clean hands can play a role in the exercise of the court's discretion whether or not to grant the remedy. The only real evidence of the alleged misconduct by the 1988 purchasers was that they knew that the 1988 sale agreements constituted a breach of the CMHC mortgages and in fact agreed to pay a higher price for the land if the operating agreements could be successfully breached. This evidence is too tenuous a foundation for the application of the principle. Absent a finding of collusion, knowledge by a purchaser that the vendor is breaching a contractual provision would be insufficient to disentitle the purchaser to equitable relief. This conclusion applies with greater force to the exercise of discretion to refuse declaratory relief in which the "unclean hands" doctrine is applied in a less structured manner and is but one of the factors to be considered.
Hongkong, which sought a judicial sale in its mortgage foreclosure action, was the only party unquestionably seeking equitable relief. There was no evidence that it was guilty of any misconduct. Hongkong was particularly free of suspicion of misconduct because it was not the original mortgagee but rather purchased a mortgage acquired by its predecessor in title.
The relationship between the numbered companies and Town House and Wellington was undoubtedly suspicious, but the conclusion that they jointly acted to free Town House and Wellington of their obligations towards CMHC could not be made without direct evidence. CMHC retained the right to accelerate the loan or increase the interest rates because the terms of the operating agreement were incorporated into the mortgages. Even if Hongkong were granted the equitable relief which it sought, CMHC was not left without a remedy for breach of its operating agreements.
The second mortgages and the 1988 sale agreements were not prohibited by the National Housing Act, 1954, and therefore were not illegal contracts. Section 16(4)(g) neither expressly nor impliedly prohibited these transactions and did not create a statutory restraint on alienation. It only required CMHC to obtain contractual restraints on disposition. To interpret s. 16 as creating an implied statutory restraint on disposition would, absent CMHC's consent, deprive Hongkong of its mortgages and the 1988 purchasers of their title. Had Parliament intended the provisions of the Act to have extra‑contractual force, it would not have used the contractual mechanism as distinct from simply legislating against alienation.
The contractual provisions cannot be enforced against strangers to the contract. Section 16 clearly applies to CMHC but not to the mortgagors, let alone third parties. CMHC's remedies are contractual, either under the terms of the operating agreements or under the terms of its mortgages. Any sale, judicial or otherwise, can only sell the property subject to the mortgages.
Parliament spoke in terms of contracts and mortgages and did intend to create restraints inconsistent with provincial property law, the common law and the Torrens system. The underlying constitutional context suggests that s. 16 should be interpreted so that it does not impliedly prohibit the transactions in question. If s. 16 were to prohibit the sale or encumbrance of properties mortgaged to CMHC, then it would be a statutory restraint on alienation altering the common law rule that restraints on alienation are void. Parliament has no jurisdiction to legislate with respect to property and civil rights in a province. By requiring the arrangements to be created by contract, Parliament avoided any doubts about the validity of s. 16.
The second mortgages were not ultra vires the corporate powers of Town House and Wellington. Both companies were still subject to the corporate ultra vires doctrine when the second mortgages were incurred. That the Articles of Continuance stated that the businesses to be carried on by the corporations were subject to the provisions of the National Housing Act was not sufficient to find the sale agreements or mortgages ultra vires. Both companies' objects did not expressly authorize them to grant second mortgages but that power is normally given by the statute. Furthermore, the ability to raise funds by making second mortgages on the companies' property was sufficiently incidental to their objects. Lastly, CMHC was not seeking to use the ultra vires doctrine to protect its position as a creditor, but rather to maintain control over Town House and Wellington. This is an improper use of the ultra vires doctrine.
The declaration in the chamber judge's formal judgment which entitled 1988 purchasers to pay off the first mortgages and redeem should be deleted. The policy against restraints on alienation does not render such provisions unenforceable for all purposes. Contractual provisions are simply ineffective to prevent the owner of land from conveying a good title to a purchaser but other in personam remedies remain available. The Crown is not immune from the rule against restraints on alienation. Even though the impugned provisions are not enforceable to prevent the transfer of a good title to the purchasers, non‑compliance constitutes a breach of the agreement which triggers other remedies which the mortgagee has under the mortgage. Clause 12 of the operating agreements, which is incorporated into the mortgages, provided for the acceleration of loan and increase of interest payments in the event of a breach. This remedy is available to the appellant because of the breach occasioned by the 1988 and 1989 sales.
The Wellington mortgage did not provide for any right of prepayment. It can only be repaid by payments over the loan period. Any discretion of the Court to allow prepayment in the absence of a prepayment clause should not be exercised here.
The Town House prepayment clause applied only when the mortgagor was not in default. In selling the properties the mortgagor committed an act of default under the agreement, and therefore under the mortgage, because the agreement formed part of the mortgage. This default, while not that of the purchasers, disentitled anyone seeking to repay the mortgage while the default continued.
The contractual postponement of the right to redeem because of the mortgagor's being given a long period within which to pay and the absence of a prepayment clause cannot be characterized as a clog on the equity of redemption.
Cases Cited
Distinguished: Re Valley Vu Realty (Ottawa) Ltd. and Victoria & Grey Trust Co. (1984), 44 O.R. (2d) 526 (H.C.), aff'd (1984), 47 O.R. (2d) 544n (C.A.); Colonial & Home Fuel Distributors Ltd. v. Skinners' Ltd. (1963), 39 D.L.R. (2d) 579 (Man. Q.B.), aff'd (1963), 46 D.L.R. (2d) 695 (Man. C.A.), aff'd [1964] S.C.R. v; In re Introductions Ltd., [1970] Ch. 199; referred to: Moody v. Cox, [1917] 2 Ch. 71; Chapman v. Michaelson, [1909] 1 Ch. 238; Tito v. Waddell (No. 2), [1977] Ch. 106; Sara v. Sara (1962), 36 D.L.R. (2d) 499; Re Morris and Morris (1973), 42 D.L.R. (3d) 550; Re MacDonald and Law Society of Manitoba (1975), 54 D.L.R. (3d) 372; Campbell v. Campbell, 300 N.Y.S. 760 (1937); Mills v. Mills, 179 A. 5 (1935); Communities Economic Development Fund v. Canadian Pickles Corp., [1991] 3 S.C.R. 388; Attorney-General v. Great Eastern Railway Co. (1880), 5 App. Cas. 473; Bell Houses Ltd. v. City Wall Properties Ltd., [1966] 2 Q.B. 656; In re New Finance and Mortgage Co., [1975] Ch. 420; In re Patent File Company (1870), L.R. 6 Ch. 83; General Auction Estate and Monetary Co. v. Smith, [1891] 3 Ch. 432; Canada Permanent Trust Co. v. King's Bridge Apartments Ltd. (1984), 8 D.L.R. (4th) 152 (Nfld. C.A.), rev'g on other grounds (1982), 24 R.P.R. 32 (Nfld. S.C.); Paul v. Paul (1921), 50 O.L.R. 211; Re Bahnsen and Hazelwood (1960), 23 D.L.R. (2d) 76; Garnet Lane Developments Ltd. v. Webster (1986), 43 R.P.R. 138; Knightsbridge Estates Trust Ltd. v. Byrne, [1938] 4 All E.R. 618.
Statutes and Regulations Cited
Act to amend the National Housing Act, 1954, S.C. 1968‑69, c. 45, s. 7.
Alberta Rules of Court, Rule 505(3).
Business Corporations Act, S.A. 1981, c. B‑15, ss. 15(1), 18, 117(2).
Chancery Act of 1850 (U.K.), 13 & 14 Vict., c. 35.
Companies Act, R.S.A. 1955, c. 53, s. 19(h).
Companies Act, R.S.A. 1980, c. C‑20, s. 20(1)(h).
Constitution Act, 1867, s. 92 .
Land Titles Act, R.S.A. 1980, c. L‑5, s. 62(1).
Law of Property Act, R.S.A. 1980, c. L‑8, s. 43.
National Housing Act, R.S.C., 1985, c. N‑11, ss. 2 "limited-dividend housing company", 26(3)(b).
National Housing Act, 1954, S.C. 1953‑54, c. 23 s. 16(3)(k) [rep. & sub. 1968-69, c. 45, s. 7], (4)(g) [idem], (h) [idem].
Quia Emptores, 1290 (Eng.), 18 Edw. I, c. 1.
Rules of the Supreme Court of Canada, SOR/83-74, rule 29 [am. SOR/88-247, s. 10].
Supreme Court of Judicature Act, 1873 (U.K.), 36 & 37 Vict. c. 66.
Authors Cited
Cheshire, Geoffrey Chevalier. Cheshire, Fifoot and Furmston's Law of Contract, 12th ed. By M. P. Furmston. London: Butterworths, 1991.
Gower, Laurence Cecil Bartlett. Gower's Principles of Modern Company Law, 4th ed. London: Stevens & Sons, 1979.
Meagher, R. P., W. M. C. Gummow and J. R. F. Lehane. Equity ‑‑ Doctrines and Remedies, 2nd ed. Sydney: Butterworths, 1984.
Palmer, Francis Beaufort, Sir. Palmer's Company Law, vol. 1, 24th ed. Clive M. Schmitthoff, ed. London: Stevens & Sons, 1987.
Sarna, Lazar. The Law of Declaratory Judgments, 2nd ed. Toronto: Carswell, 1988.
Stevenson, W. A., and J. E. Côté. Civil Procedure Guide. Edmonton: Juriliber, 1989.
Zamir, Itzhak. The Declaratory Judgment. London: Sweet & Maxwell, 1986.
APPEAL from a judgment of the Alberta Court of Appeal (1990), 77 Alta. L.R. (2d) 149, 111 A.R. 42, 75 D.L.R. (4th) 307, 14 R.P.R. (2d) 1 and (1991), 78 Alta. L.R. (2d) 236, 112 A.R. 85, 75 D.L.R. (4th) 561, dismissing an appeal from a judgment of Veit J. rendered December 13, 1989, allowing an appeal from an order of Master Quinn (1989), 67 Alta. L.R. (2d) 337, 99 A.R. 94, 8 R.P.R. (2d) 189, dismissing an application to sell the property. Appeal allowed in part.
Francis C. R. Price, Wesley M. Pedruski and Kent N. Bilton, for the appellant.
Dennis F. Pawlowski and Douglas L. Kennedy, for the respondent Hongkong Bank of Canada.
Donald J. Boyer, Q.C., and Michael R. Kinash, for the respondents 375069 Alberta Ltd., 386360 Alberta Ltd. and 376491 Alberta Ltd.
Robert L. Duke, Q.C., and Lorne A. Smart, for the respondents Town House Development Ltd., Wellington Housing Developments Ltd. and Wheeler Holdings Ltd.
John A. Weir, Q.C., for the respondents Kate Wheeler, Pamela K. Wheeler, George L. Wheeler, Lois Anderson and Patricia May Kirk.
Françoise Saint‑Martin, for the intervener the Attorney General of Quebec.
//Sopinka J.//
The judgment of the Court was delivered by
Sopinka J. ‑‑ The main issue in this appeal is whether the appellant mortgagee can successfully impeach a subsequent mortgage and sale on the basis of statutorily mandated contractual terms prohibiting a sale or disposition of the mortgaged property. An affirmative answer to this question would raise a constitutional issue with respect to the vires of Parliament to legislate this result. The appeal also raises the issues of corporate ultra vires and the validity of covenants in restraint of alienation of real property.
The Facts
The respondents Town House Development Ltd. ("Town House") and Wellington Housing Developments Ltd. ("Wellington") are "limited‑dividend housing companies", as defined by the National Housing Act, R.S.C., 1985, c. N‑11, s. 2 :
"limited‑dividend housing company" means a company incorporated to construct, hold and manage a low‑rental housing project, the dividends payable by which are limited by the terms of its charter or instrument of incorporation to five per cent per annum or less;
Town House and Wellington were originally incorporated under The Companies Act, R.S.A. 1955, c. 53. The memoranda of association of Town House and Wellington state that the objects of the companies "are subject to the provisions to the National Housing Act , 1954 and amendments thereto".
In 1956 and 1958, the appellant Canada Mortgage and Housing Corporation ("CMHC") loaned money to Town House and Wellington to build and operate two low‑rental housing projects in Edmonton. The loans were secured by first mortgages at low rates of interest of 3 1/2% and 4 1/4% per annum respectively. The "term of the loan" was defined in the mortgage as being "the period ending forty years after the project completion date, whether or not the loan shall have been earlier repaid, (which the Corporation [CMHC] hereby declares to be a term not exceeding the useful life of the project)". The Town House mortgage has a prepayment provision, which is available only when the mortgagor is not in default. The Wellington mortgage does not contain a prepayment provision. Both mortgages provide that their terms are "in addition to those granted or implied by statute", and that the mortgages are made pursuant to the National Housing Act, 1954, S.C. 1953-54, c. 23.
Along with the mortgages, CMHC entered into operating agreements with both Town House and Wellington. The operating agreements include terms mandated by s. 16(4)(g) of the National Housing Act, 1954:
16. . . .
(4) A contract with a limited‑dividend housing company entered into under this section shall provide that
. . .
(g) except with the consent of the Corporation [CMHC] and on such terms and conditions as the Corporation may approve the project or any part thereof shall not be sold or otherwise disposed of during the term of the loan;
Accordingly, the operating agreements prohibit the mortgage or sale of the projects without the approval of CMHC. The relevant paragraphs of these agreements are as follows:
1. DEFINITIONS
. . .
(iv)"The term of the loan" shall be the period ending forty years after the project completion date, whether or not the loan shall have been earlier repaid, (which the Corporation hereby declares to be a term not exceeding the useful life of the project).
4. PROHIBITION AGAINST ENCUMBRANCES
The project, or any part thereof, so long as there shall be any part of the loan or interest thereon remaining unpaid, shall not be mortgaged, charged or otherwise encumbered other than by a first mortgage in favour of the Corporation, without the approval of the Corporation.
12. DEFAULT
The Corporation shall have the right, in the event of the Borrower failing to maintain the low‑rental character of the project or otherwise committing a breach of this agreement, to declare the unpaid principal of the loan due and payable forthwith or to increase the interest payable thereafter on the unpaid balance of the said loan to such rate as the Governor in Council may determine.
16. SALE OF PROJECT
The project or any part thereof shall not be sold or otherwise disposed of during the term of the loan except with the consent of the Corporation and on such terms and conditions as the Corporation may approve.
The mortgages adopt the terms of the operating agreements, providing that the operating agreements form part of the mortgages and that breach of the operating agreements constitutes breach of the mortgages. In other words, sale or encumbrance of the properties without CMHC's consent would constitute both breach of the operating agreements and default of the mortgages.
In 1981, the Bank of British Columbia loaned $3 million to Town House and Wellington, along with the respondent Wheeler Holdings Ltd. ("Wheeler"). The loan was secured by second mortgages on the projects and was personally guaranteed by the respondents Pamela K. Wheeler, Lois Anderson, Kate Wheeler, George L. Wheeler and Patricia May Kirk (all of whom are related). CMHC did not consent to the second mortgages. This mortgage was among the assets purchased by the respondent Hongkong Bank of Canada ("Hongkong") from the Bank of British Columbia in 1986.
In February 1982, Alberta adopted a new corporate law regime when the Alberta Business Corporations Act, S.A. 1981, c. B‑15, was proclaimed in force. The new regime required companies incorporated under the Companies Act, R.S.A. 1980, c. C‑20, to obtain continuances under the Alberta Business Corporations Act within prescribed times. Pursuant to these requirements, Wellington was continued under the Alberta Business Corporations Act in June 1985. Town House was continued in February 1986.
In 1988, Town House and Wellington agreed to sell the projects ("1988 sales") to the respondents 375069 Alberta Ltd. and 386360 Alberta Ltd. ("1988 purchasers"). The 1988 purchasers are owned and controlled by one person, John Ryan. Ryan is married to the respondent Pamela K. Wheeler who is one of the guarantors of the Bank of British Columbia mortgage and a sister to the two directors of Town House and Wellington, George L. Wheeler and Patricia May Kirk. CMHC did not consent to these sales. The 1988 sale agreements provided that title would be given to the 1988 purchasers free and clear of obligations under the CMHC operating agreements, and provided for liquidated damages if such title could not be given. These sale agreements also contained a provision expressly negating and rejecting the covenants implied by s. 62(1) of the Alberta Land Titles Act, R.S.A. 1980, c. L‑5, with the result that the transferees did not assume the obligations under the mortgage.
In 1989, Hongkong began an action to foreclose on its second mortgages. Hongkong proposed a judicial sale of the projects ("1989 sale") to yet another numbered company owned by Ryan, namely the respondent 376491 Alberta Ltd. ("1989 purchaser"). The 1989 sale agreements provided that the 1989 purchaser would get title subject to the CMHC mortgages but free and clear of the terms of the CMHC operating agreements.
Hongkong sought approval of the 1989 sale from the Alberta Court of Queen's Bench, but on June 20, 1989 a Master refused this approval: 67 Alta. L.R. (2d) 337, 99 A.R. 94, 8 R.P.R. (2d) 189. Hongkong appealed this finding to a chambers judge, and the 1988 purchasers commenced an action seeking a declaration that they were owners of the projects under the 1988 sale agreements and that they were not bound by the CMHC operating agreements. The appeal and the actions were heard together by the chambers judge. On December 13, 1989, the 1989 sale was approved by the chambers judge and the 1988 purchasers were granted the declaration they requested. Appeals were launched by CMHC in respect of each proceeding.
CMHC's appeal to the Alberta Court of Appeal was dismissed on November 15, 1990: 77 Alta. L.R. (2d) 149, 111 A.R. 42, 14 R.P.R. (2d) 1, 75 D.L.R. (4th) 307. A further order as to costs was made on January 4, 1991, in which the court awarded solicitor and client costs to CMHC and Hongkong: 78 Alta. L.R. (2d) 236, 112 A.R. 85, 75 D.L.R. (4th) 561.
Lower Court Judgments
Alberta Court of Queen's Bench (Master Quinn)
After a review of the facts, the Master noted that the effect of granting the order sought by Hongkong, which included a declaration that the provisions of the operating agreements preventing sale and encumbrance were unenforceable and void, would be that the 1989 purchaser would no longer be obliged to operate the projects as low‑rental housing. The submissions in support of the desired order relied on Canada Permanent Trust Co. v. King's Bridge Apartment Ltd. (1982), 24 R.P.R. 32 (Nfld. S.C.), which held that a covenant in a mortgage prohibiting dealing with the property without consent of the mortgagee was void as a restraint on alienation. The statute of Quia Emptores of 1290, 18 Edw. I, c. 1, had established that fee simple is alienable property. The Master cited several authors for the proposition that restraint on alienation means a limitation on the free use of property by the new owner of property.
The Master reviewed several cases where restraints which were held to be invalid were contained in the document which conveyed fee simple, not in some other contract to which the landowner was a party. He stated that he was not convinced that King's Bridge was correct and he refused to follow it. The Master distinguished another case in which the restraints had been contained in the sale agreement and not in a mortgage. The Master also rejected an argument that the provisions in the CMHC mortgages should be held void as clogs on the equity of redemption, holding that these arguments were premature.
As a result, the Master dismissed the application. The Master ordered Hongkong to pay CMHC's costs, but refused to award costs to any other parties.
Alberta Court of Queen's Bench (Veit J.)
The chambers judge rendered judgment orally. After reviewing the facts and the parties' submissions, which for the first time raised the issue of the constitutional validity of the National Housing Act , the chambers judge stated that she generally accepted the arguments of those opposing the restrictions and rejected CMHC's arguments. Turning first to statutory interpretation, it was noted that the competent legislature can change the common law. However, there is a presumption that the legislature does not intend to make a substantial alteration of law beyond that which it explicitly declares. In addition, there is a presumption that a legislature does not intend to take away private property rights unless it does so explicitly. Given that the relevant concepts of free alienation and the equity of redemption are so fundamental, these presumptions were held to apply. Parliament did not change the common law explicitly. Therefore, "worthwhile as they may be, the objectives of the National Housing Act have to be met within the confines of the common law."
The chambers judge then turned to the constitutional issue. She stated that in general, property law is within provincial jurisdiction. No argument in support of federal jurisdiction had been made under the peace, order and good government power, and there was some provincial legislation in Alberta regarding the effect of the National Housing Act in Alberta, indicating that there was no federal jurisdiction to affect property rights in a province. Thus even if she were wrong with respect to the statutory interpretation issue, the chambers judge would hold that there was no statutory authority to enforce the CMHC mortgages because of the constitutional impediment to federal jurisdiction.
The chambers judge then held that the provisions of the operating agreements which stated that the agreements would remain in force for the term of the loan (40 years) should be struck down as clogs on the equity of redemption. The chambers judge then commented on CMHC's allegations that there was a deliberate attempt to evade the terms of the mortgages, stating that the parties' motives were irrelevant to the legal validity of the clauses in question. CMHC's own motives of providing cheap housing were not enough to resolve the dispute in its favour. CMHC had to achieve its objectives within the "common law structures of real property entitlements".
The chambers judge rejected an argument that the Crown should not be bound by common law when pursuing its purposes. The statute of Quia Emptores was a derogation from the Crown's right to control real property, and the Crown could not revert to the pre‑Statute position without clear language. The chambers judge also rejected an argument that the sales were ultra vires the corporate objects of Town House and Wellington.
As a result, the chambers judge allowed the appeal, granted an order approving the 1989 sale of the properties and granted a declaration that the impugned provisions of the CMHC mortgages were invalid and that the 1988 purchasers were entitled to redeem. Hongkong was awarded solicitor and client costs from the other parties, and CMHC was ordered to indemnify other parties for costs payable to Hongkong.
Alberta Court of Appeal (1989), 77 Alta. L.R. (2d) 149 (Lieberman, Haddad and Irving JJ.A.)
The reasons of the court were delivered by Lieberman J.A. The court began with a review of the facts. The first issue was whether the National Housing Act creates a statutory restraint on alienation running with the land. The court held that the issue was settled by the presumption that a legislature does not intend to make any substantial alteration of the law beyond what is explicitly declared. "[I]f Parliament had intended to create a statutory restraint of alienation it would have done so explicitly" (p. 158). In addition, existing law should not be altered except to the extent necessary to implement the statutory language. "The right to freely alienate land is fundamental to fee simple ownership. There can be no change to this proposition without clear legislative mandate. That mandate is absent in the legislation relevant to these appeals" (p. 158). Given the conclusion on the statutory interpretation issue, the court found it unnecessary to deal with the constitutional issue.
The court noted that CMHC relied on three cases for its position that the operating agreements created valid restrictive covenants restraining alienation of the land, but the court distinguished all three cases. The court therefore concluded that unless CMHC could bring itself within the Crown immunity exception or the restrictive covenant exception, the impugned provisions were either personal covenants or void conditions in restraint on alienation. With respect to the Crown immunity exception, the court agreed with CMHC that the statute of Quia Emptores never bound the Crown. However, a 1327 statute had altered Crown immunity by providing that even tenants holding land directly from the Crown could alienate their land. The proposition that the Crown is not immune from the rule against restraints on alienation had also been confirmed by the courts.
With respect to the argument that the operating agreement created a restrictive covenant, the court noted that a restrictive covenant requires three conditions. First, the restriction must be negative. Second, one plot of land must bear a burden and another must receive the benefit (that is, there must be a dominant and a recessive tenement). Third, the defendant cannot set up the overriding defence in equity of purchase of legal estate for resale without notice. The restriction in question was negative in nature. However, in Alberta a mortgage is only a charge against land. The mortgagee does not hold the legal estate. Thus the rule that a covenant not involving a grant does not run with the land except as between landlord and tenant is particularly important where the issue is a restrictive covenant. As a result, the second requirement for a restrictive covenant was not met and the court concluded that the covenants in question did not run with the land. In addition, there was no benefit to the land because the mortgagee's objects were benefitted but there was no benefit to the mortgage interest itself. With respect to the third requirement, annexing the covenants to mortgages which were registered against title was sufficient notice to subsequent purchasers or encumbrancers. Thus the court concluded that "the requirements of the restrictive covenant creating a right in rem that runs with the land are not met" (p. 164).
Given its finding that the covenants were not restrictive covenants, the court held that it was unnecessary to determine whether the restrictive covenants would be unenforceable as clogs on the equity of redemption. The court also reviewed the objects of Town House and Wellington, concluding that the second mortgages were not ultra vires their corporate objects. The court relied upon s. 19(h) of The Companies Act, R.S.A. 1955, c. 53, which provided that a company may raise money by any means unless its objects expressly restrict such a power. In addition, the National Housing Act did not bar the second mortgages, as it merely provided that mortgagors must contract not to enter into subsequent mortgages. It did not provide that mortgagors could not enter into subsequent mortgages.
The court then turned to CMHC's submission that the respondents should be precluded from profiting from their own wrong. The court concluded that the second mortgages were not illegal contracts because the National Housing Act was not a statutory prohibition on sale or disposition of the properties. The court distinguished several cases which had held that the court would not assist in profiting from one's own wrong. The court found no evidence of an intention to circumvent the contractual liability of the Town House and Wellington, and therefore it was not an appropriate case to pierce the corporate veil.
As a result, the appeal was dismissed. On January 4, 1991, the court issued supplementary reasons with respect to costs. The court allowed CMHC's appeal of the costs order made by the chambers judge. The court found that the respondents knowingly breached the operating agreements. Despite their success in the appeal, they did not have clean hands. As a result, Town House and Wellington were ordered to pay costs to CMHC and Hongkong on a solicitor and client basis. No other parties were awarded costs.
The Issues
1. Clean Hands: It was submitted that the action for a declaration and the application for a judicial sale are claims for equitable relief to which the respondents have disentitled themselves.
2. Illegality: The appellant submits that by virtue of s. 16(4)(g) of the National Housing Act, 1954 the second mortgages and the 1988 and 1989 sales are illegal as either prohibited by statute or the policy underlying it. If the appellant is correct, the respondents raise a constitutional question as to whether the section is ultra vires. I have concluded that the appellant fails in respect of this submission and it will not be necessary to answer the constitutional question.
3. Corporate Ultra Vires: The appellant submits that the second mortgages and the agreements of sale are beyond the corporate powers of the respondents Town House and Wellington.
4. Prepayment of Mortgages: The appellant asks that the declaration that the respondents, the 1988 purchasers, are entitled to redeem the properties upon payment of the amounts outstanding under the first mortgages be set aside. The respondents, except Hongkong, have served and filed a motion under Rule 29 of the Rules of the Supreme Court of Canada, SOR/83-74, to vary the judgment of the Court of Appeal to declare that the clauses prohibiting sale or mortgage are void and not merely unenforceable. In order to decide these issues it is necessary to consider whether these provisions must be struck down as void restraints on alienation or are valid as personal covenants. If they are the latter, then it is further necessary to decide whether their breach is a default under the mortgage disentitling the 1988 purchasers to prepay. This in turn raises the issue as to whether in this event the provisions in the mortgage are a clog on the equity of redemption and, therefore, void.
5. Costs: The respondents, except Hongkong, have moved pursuant to our Rule 29 to vary the order as to costs made by the Court of Appeal.
Analysis
1. Clean Hands
CMHC argues that the respondents should be denied the relief they seek because they are guilty of misconduct such as to disentitle them from equitable relief. Assuming for the moment that Town House and Wellington were legally capable of granting the second mortgage to the Bank of British Columbia (Hongkong Bank) and of disposing of the projects via the agreements for sale, it is evident that they have committed a flagrant breach of their contracts with CMHC. However, it is not Town House and Wellington who seek relief from the court in this action. With respect to the parties who are seeking relief from the court, I am not convinced that the remedies sought constitute equitable relief in every case or that there is in any event sufficient evidence before the court to conclude that these respondents have unclean hands. There is accordingly no equitable ground upon which to deny relief to the respondents.
In determining whether the respondents are entitled to equitable relief, it is important not to paint all the respondents with the same brush. As was noted in Moody v. Cox, [1917] 2 Ch. 71 (C.A.), at pp. 87‑88, "equity will not apply the principle about cle