Freeborn et al. v. Goodman

Freeborn et al. v. Goodman
Collection
Supreme Court Judgments
Date
1969-06-16
Report
[1969] SCR 923
Judges
Cartwright, John Robert; Martland, Ronald; Judson, Wilfred; Ritchie, Roland Almon; Spence, Wishart Flett
On appeal from
Ontario
Subjects
Property law
Decision Content
Supreme Court of Canada
Freeborn et al. v. Goodman, [1969] S.C.R. 923
Date: 1969-06-16
D. Freeborn et al., (Defendants) Appellants;
and
Henry G. Goodman (Plaintiff) Respondent.
1968: June 7, 11, 12; 1969: June 16.
Present: Cartwright C.J. and Martland, Judson, Ritchie and Spence JJ.
ON APPEAL FROM THE COURT OF APPEAL FOR ONTARIO.
Real property—Mortgages—Developer conveying apartment building to company and taking back second mortgage—Exclusive right of occupancy of individual suites sold to proprietary lessees—Whether priority of interest conveyed to proprietary lessees over that of assignee of second mortgage.
On June 15, 1959, F entered into an agreement with B Ltd. for the sale to B Ltd. of a parcel of land on which he had commenced the construction of an apartment building. B Ltd. had recently been incorporated by F, and, at the time was controlled by him. B Ltd. agreed to buy the lands and premises with the apartment building “completed and equipped” for $844,500, which was to be paid by the assumption of a first mortgage on the premises in the amount of $310,000 and the sale of the exclusive right of occupancy of the apartment suites. Such sales were to be in accordance with the terms set out in a form of offer to purchase attached to the agreement. F agreed to accept as security a second mortgage if B Ltd. could not pay him the balance of the purchase price in cash on the closing date. As a further protection it was stipulated in the agreement that F was to be entitled to retain possession of all unsold suites until he had been paid in full.
The offer to purchase, which incorporated by reference a form of agreement and lease, contemplated the sale by B Ltd. of the exclusive right of occupancy of a suite in the apartment building and that one share of B Ltd. was to be issued in respect of each dollar paid by the purchaser who could make payment either wholly in cash or partly in cash and the balance by assuming part of the total mortgage encumbrance against the apartment premises.
Although the appellant purchasers went into possession of their suites in accordance with the terms of the agreement and lease, the document itself was not signed by any of them until the amount of the second mortgage had been determined. The executed agreements were dated April 1, 1960, which was one day after the date of the deed to B Ltd. and the second mortgage to F Ltd., the nominee of F, and twenty-five days prior to the recording of the latter document.
In 1961 the second mortgage was assigned for value to one S in trust and in 1963 was assigned by S without consideration to the respondent. At the time S took he had full knowledge of all dealings between the F companies and the appellants.
As a result of having recovered a judgment nisi against B Ltd. for foreclosure of the second mortgage, the respondent demanded that from April 1, 1964, the appellants should vacate their respective suites or enter into a rental determined by him. Following their refusal to comply with his demand, the respondent brought an action for possession of the suites and for payment of occupation rent with respect thereto. The appellants claimed the right to retain possession so long as they made the payments stipulated in their agreements with B Ltd. At trial, it was held that they were licensees, with a contractual right to exclusive possession which they could maintain against the respondent. The respondent’s appeal was allowed by unanimous decision of the Court of Appeal. From that judgment an appeal was brought to this Court.
Held (Martland J. dissenting): The appeal should be allowed and the trial judgment restored.
Per Cartwright C.J. and Judson, Ritchie and Spence JJ.: Each of the appellants acquired by way of purchase an equitable title to the exclusive right of occupancy of their respective suites and to quiet possession thereof so long as they remained the owner of the shares allotted to them in B Ltd. and were not in default under the terms of the agreement and lease.
The question of priority as between the interests of the appellants and that of the respondent was dependent upon the nature of the interest vested in B Ltd. at the time when the second mortgage was executed on March 31, 1960. It was apparent that on that date when F executed the deed to B Ltd. he had, in concert with that company and in accordance with the terms of the agreement of sale, already divested himself of the interest conveyed to the appellants and that this was well known and accepted by F Ltd. and by the successive holders of the second mortgage. It followed that the interests conveyed to the appellants were no longer the property of B Ltd. to mortgage, and that the property mortgaged to F Ltd. was then encumbered to the extent of the suites which it had sold.
Under the special circumstances of this case the equities against the recognition of an outstanding vendor’s lien outweighed those in favour of it. The second mortgage was a security which was entirely independent of the lien and which was from the very outset contemplated as being accepted by F as full payment and therefore as a substitution for any unpaid vendor’s lien which might otherwise have been outstanding.
Accordingly, the judgment nisi rendered in favour of the respondent against B Ltd. for foreclosure of the second mortgage did not clothe him with any right to disturb the appellants in the quiet enjoyment of the apartment suites acquired by them pursuant to the agreement of sale and the offer to purchase and agreement and lease which were annexed thereto.
Per Martland J., dissenting: The agreement of June 15, 1959, contemplated that, in entering into agreements for the occupancy of suites, B Ltd. could only do so on the basis of an agreement with the occupants which specifically recognized the existence of a second mortgage on the whole of the lands and premises. B Ltd., in dealing with the appellants, carried out this obligation. The fact that most of the appellants took possession of their suites before signing the final agreements with B Ltd. did not alter the position, in view of the fact that each suite occupant did sign such an agreement, which, by its terms, replaced all prior agreements, and which specifically acknowledged the amount of the second mortgage against the whole of the lands and premises. The position was, therefore, that B Ltd. could not grant any right or interest in the lands which was not subject to the second mortgage, and that, in fact, it never purported to do so.
The agreement of B Ltd. to give a second mortgage to secure the balance of the purchase price was performed, and the second mortgage was executed and registered. The second mortgagee, therefore, had equitable rights prior to any rights of the appellants, which mortgagee’s rights, in due course, were assigned to the respondent.
Also, as held by the Court below, the submission that there was an equitable estoppel which precluded F, and his successors, from asserting priority for the second mortgage as against the appellants should fail.
APPEAL from a judgment of the Court of Appeal for Ontario[1], allowing an appeal from a judgment of Donnelly J. Appeal allowed, Martland J. dissenting.
A.S. Pattillo, Q.C., and J.W. Garrow, for the defendants, appellants.
S.L. Robins, Q.C., for the plaintiff, respondent.
The judgment of Cartwright C.J. and Judson, Ritchie and Spence JJ. was delivered by
RITCHIE J.:—This is an appeal brought with leave of this Court from a unanimous judgment of the Court of Appeal for Ontario1 which allowed an appeal by the respondent from a judgment of Donnelly J., whereby he had dismissed the respondent’s action against the appellants for possession of certain apartment suites occupied by them and for payment of occupation rent with respect thereto.
The respondent’s claim was asserted as the result of his having recovered a judgment nisi against Hamilton Benvenuto Apartments Limited (hereinafter called Benvenuto) for foreclosure of a second mortgage dated March 31, 1960, and recorded on April 26 of that year, made by Benvenuto as mortgagor in favour of Frisina Enterprises (Hamilton) Limited (hereinafter called Frisina Enterprises), which second mortgage was assigned for value to one Samuel Stein in trust and by him assigned without consideration to the respondent who is his partner. The Benvenuto Company, of which all the appellants are shareholders, was the owner of an apartment building in which they all occupied apart- ment suites, the exclusive right of occupancy to which had been sold to each of them in accordance with certain agreements which will hereafter be discussed.
The practical question here at issue between the parties is whether or not the interests purchased by the appellants in the Benvenuto apartment building should take priority over the respondent’s interest as assignee of the second mortgage. The learned trial judge found that the appellants had acquired a licence to occupy their apartments coupled with a contractual interest of which the respondent had full notice when he took the assignment of the second mortgage, and that the appellants’ title therefore took precedence over that of the respondent; whereas Mr. Justice Laskin, in the reasons for judgment which he rendered on behalf of the Court of Appeal, treated the appellants as having acquired no interest in land which could take precedence over the respondent’s mortgage and found that in any event there was an outstanding interest by way of unpaid vendor’s lien to which the respondent fell heir as the assignee of the second mortgage and that this took priority over any interest which the appellants may have acquired.
This litigation arises out of the implementation of a plan or scheme devised by one Alfonso Frisina in the spring of 1959 for financing the construction and operation of a 48-suite apartment building to be erected on property owned by him in Hamilton. As will hereafter appear, Frisina’s plan was to a great extent modelled on the type of co-operative housing arrangement which in the past has been more commonly used in the United States of America than in this country, but it will be seen that the method here employed departed in certain essential respects from the procedure which is usually employed in such cases.
The essence of the Frisina scheme can best be explained by reference to the agreement of sale dated June 15, 1959, by which he conveyed the apartment building to Benvenuto, a company which had then issued only five shares, all of which were owned or controlled by Frisina.
The agreement discloses that Frisina had mortgaged the premises in August, 1958, in the amount of $310,000 to the London Life Insurance Company and had commenced the construction of the apartment building. Benvenuto agreed to buy the lands and premises with the apartment building “completed and equipped” for $844,500, which was to be paid by the assumption of the London Life mortgage and the sale of the exclusive right of occupancy of the apartment suites, and it was provided also that:
If on the closing of the transaction herein the Company is unable to pay to the vendor the whole of the balance due on closing, namely, Five Hundred and Thirty-Four Thousand and Five Hundred Dollars ($534,500.00)...then on account of such deficiency and to the extent of such deficiency the vendor agrees to take back a second mortgage on the said lands and premises and the said forty-eight suite apartment building.
In order to afford greater security to Frisina, the vendor, it was also provided:
…that until all the suites in the said forty-eight suite apartment building shall have been sold and the vendor shall have been paid the full balance of the purchase of the said apartment building and premises as aforesaid, then the vendor shall be entitled to retain possession of all such unsold suites upon payment to the Company of the monthly operating charge, as referred to and defined in the said Offer to Purchase (appendix A), designated in respect to such unsold suites and the vendor shall further be entitled to sell the same to such person or persons as the said vendor may deem fit,…
In my view the paramount condition pursuant to which the company was to acquire title under this agreement is that contained in para. 7 which reads:
The Company agrees to sell the exclusive right of occupancy of the suites in the said forty-eight suite apartment building at the prices shown in and in accordance with the terms and conditions set out in the form of Offer to Purchase attached hereto as Appendix A.
It is important in considering the nature of the title which Benvenuto conveyed to the purchasers of suites to bear in mind the fact that their occupancy was in all cases controlled by the terms of an “Offer to Purchase” which incorporated by reference a form of “agreement and lease” which was designed to be executed before possession was taken but which was in fact not signed by any of the appellants until some considerable time later. It is enough to say of the form of “Offer to Purchase” that it clearly contemplated the sale by Benvenuto of the “exclusive right of occupancy” of a “suite in the apartment building known as Benvenuto Apartments” and that one share of the Benvenuto Company was to be issued in respect of each dollar paid by the purchaser who could make payment either wholly in cash or partly in cash and the balance “by assuming part of the total mortgage encumbrance against the said apartment building premises”. The terms of the form of “agreement and lease”, however, require closer examination. Throughout this document the purchasers are referred to as “proprietary lessees” and although no second mortgage was in existence when the form of “agreement and lease” was prepared, and, if all had gone well and all the apartments had been sold there would have been no need for such an encumbrance, there is, nevertheless, an express reference to it in the third recital which reads:
AND WHEREAS the said described lands and premises are vested in the Company subject to a first mortgage in favour of the London Life Assurance Company for $310,000.00 with interest at 6¾% per annum, and…subject to a second mortgage in favour of Alfonso Frisina securing the sum of $ with interest at 6¾%, which second mortgage shall be an open mortgage (it being the intention of all parties that the second mortgage shall if possible be paid off in full out of the proceeds of moneys paid by the Proprietary Lessees in respect of the said apartment suites and the said car parking spaces sold under the terms of this agreement).
All but three of the appellants had entered into the agreements and had taken possession of their suites before March 1, 1960, and of the other three, the appellant Swan, who had by that time also entered into possession, had acquired his title from a Mr. Airey, who was one of the original “proprietary lessees” and the other two appellants had acquired title through Frisina himself and had also signed the agreement before March 1, 1960. As to the respective positions of the appellants, I adopt the approach taken by Mr. Justice Laskin when he said, speaking on behalf of the Court of Appeal:
Following the execution of the agreement of June 15, 1959, between Frisina and Benvenuto the former proceeded thereunder to arrange for sales of exclusive rights of occupancy of the various suites. In this connection it is unnecessary to distinguish the positions of those defendants who were original occupants and those who bought unsold suites held by Frisina and those who took an approved assignment from an original occupant. I shall take it that the defendants went into possession of their respective suites between September 14, 1959 and March 1st, 1960 (after entering into agreements with Benvenuto in the form of the specimen offer to purchase.)
The singular feature of the last-quoted recital is that at the time when the purchasers, or their predecessors in title signed the form of “Offer to Purchase” which was in each case accepted by Benvenuto, and of which the “agreement and lease” forms a part, Frisina had not yet deeded the property to Benvenuto and all concerned with the trans- action knew perfectly well that there was no second mortgage in existence and that the agreement under which Benvenuto was purchasing the building from Frisina made it clear that such a mortgage would only be given if the company was unable to pay the whole of the balance of the purchase price on closing.
The second and fourth clauses of the form of “agreement and lease” indicate the nature of the interest which was purchased by the appellants and which Benvenuto intended to convey. Clause 2 provides that:
Each Proprietary Lessee shall be entitled to exclusively use and enjoy the apartment suite set opposite his or her name in the second column of said Schedule “B” so long as such Proprietary Lessee is the owner of all the shares set opposite his or her name in the eighth column of the said schedule “B” and on condition that such Proprietary Lessee abides by the terms and conditions of this agreement including the rules and regulations established by the Company as hereinafter provided.
Clause 4 of the agreement provides that:
So long as each Proprietary Lessee is the owner of the shares set opposite their respective names and is not in default under this agreement and fully complies with all rules and regulations established by the Company, such Proprietary Lessee shall have quiet possession of the apartment suite set opposite such Proprietary Lessee’s name.
Clauses 10 and 11 of the same document contain some interesting provisions describing the company’s powers in the event of default by the proprietary lessees. Clause 10 provides that if the default continues for more than one month
…then the Company may on one month’s written notice to such Proprietary Lessee, if default continues, retake possession of the said apartment suite occupied by such Proprietary Lessee or his sub-tenant.
And cl. 11 reads:
And it is further covenanted, declared and agreed that in the event of default having occurred in the payment of any sum payable as aforesaid by any Proprietary Lessee to the Company, the Company may (notwithstanding any other right or power of the Company) distrain therefor upon the lands, tenements, hereditaments, and premises of the Proprietary Lessee and by distress warrant recover by way of rent reserved, as in the case of a demise, so much of such sum as shall remain in arrears and unpaid together with all costs attending such distress.
(The italics are my own).
The 12th clause of this document provides that:
12. This agreement shall replace any previous agreement or agreements entered into by any of the proprietary lessees with reference to the ownership, use and occupancy of the said apartment suites. Although the appellants had taken possession of their suites to the extent hereinbefore indicated in accordance with the terms of the agreement and lease, the document itself was not signed by any of them until the amount of the second mortgage had been determined and inserted in the third recital. The executed agreements are dated April 1, 1960, which is one day after the date of the deed to Benvenuto and the second mortgage to Frisina Enterprises and twenty-five days prior to the recording of the latter document.
It will be seen from all the above that the title to the premises and apartment building taken by Benvenuto under the agreement of sale of June 15, 1959, was subject to its agreement to sell the exclusive right of occupancy of the suites and in my opinion as each such suite was sold in accordance with this agreement, the interest of Benvenuto was diminished to the extent that it had conveyed to another the exclusive right of occupancy of its building. The only title which Benvenuto acquired by the deed of March 31, 1960, and which it had to dispose of on the same date when it gave the second mortgage to Frisina Enterprises Limited was, in my opinion, encumbered by reason of the sales which had already been made. In the course of his reasons for judgment, Mr. Justice Laskin makes something of the fact that the date upon which the form of agreement and lease was executed by the purchasers is not established by the evidence and may well have been after the second mortgage but, as I have indicated, he accepts the fact that the defendants went into possession of their respective suites before the second mortgage was given and in accordance with the offer to purchase which incorporated the form of agreement and lease. I think that the purchasers must be treated as having acquired whatever title they did acquire at the time when they took possession in accordance with the offer.
It will be apparent from the passages which I have quoted from the “Offer to Purchase” and the “Agreement and Lease” that what was conveyed by way of sale to the purchasers or “tenant lessees” was “the exclusive right of occupancy” of a suite in the apartment building with quiet possession thereof for so long as each of them continued to be the owner of the shares alloted to them and was not in default under the agreement. There is elaborate provision in clauses 10 and 11 of the “Agreement and Lease” for eviction of any tenant lessee who is in default, including a covenant to the effect that in such event Benvenuto could distrain for recovery “by way of rent reserved, as in the case of a demise”, but there is no suggestion that any of the appellants was at any time in default and in my view until such default occurs, no “proprietary lessee” could be subject to eviction at the suit of Benvenuto. As I mentioned at the outset, the scheme employed for the financing and operation of the apartment building was in many respects based on the method devised for financing similar undertakings in the United States of America. This is made evident by reference to an article on Co-operative Apartment Housing in 61 Harvard Law Review at p. 1408 where it is said:
A co-operative apartment house requires legal machinery which will give the individual tenant-owner something closely approximating “title to a slice of air,” while reserving to a collective entity the function of management and the power to assure proportional sharing of common expenses. Customarily, the promoter initiating the venture organizes a corporation, which acquires the land and building, normally subject to a mortgage. The prospective tenant-owner buys a block of shares corresponding to the value of the apartment to be occupied, receiving also a long-term or renewable lease. Rent is nominal, but the board of directors, elected by the tenant-shareholders, makes assessments for current expenses as well as for payments of interest and principal on the mortgage. The leases include provision for forfeiture at the option of the corporation on failure to pay assessments or on assignment without the consent of the board of directors.
The most essential difference between Frisina’s scheme and the model upon which it appears to have been based, is that in the case of the present proprietary lessees the duration of the term of their occupancy was not fixed by specifying the number of years in the first instance or by reference to some collateral matter in itself certain or capable of being rendered certain. I agree with the submission of the respondent that by reason of this omission the interests taken by the appellants cannot be said to be leases in the strict sense of the word, but in a case such as the present one where the tenant lessees have taken possession for valuable consideration and where their tenancy is terminable only on default, I do not think that the failure to fix a term is to be construed as cutting down the extent of the interest conveyed to them under the provisions of the “agreement and lease”. In the case of The Trust and Loan Company of Canada v. Lawrason[2], the question to be determined was whether the Trust and Loan Company, by reason of the terms of the mortgage held by it, was to be treated as having redemised certain lands so as to create a landlord and tenant relationship whereby mortgage payments were to be considered as rent so that they would rank in priority to the claims of other creditors. The mortgage contained an “attornment” clause as follows:
…and the mortgagor does release to the Company all his claims upon the said lands and doth attorn to and become tenant at will of the Company subject to the said proviso,…
and there was also a provision for the mortgagor to distrain for arrears of interest after notice “as in the case of the demise of said land” and there was a covenant that until default of payment the mortgagor should have quiet possession. The Court of Appeal held that there was no fixed term and that the interest payments could not be treated as “fixed rent” under a tenancy. This Court was equally divided but the reasons for judgment affirming the Court of Appeal were written by Mr. Justice Strong who, in rejecting the argument that a tenancy at will was created by the attornment clause said:
This attornment clause appears to be so utterly inconsistent with the proviso, that the mortgagor should have quiet possession until default, that the one or the other of these clauses must be void for repugnancy. The mortgage deed, operating as a conveyance to the mortgagee of the whole fee, these provisions are in the nature of redemises to the mortgagor, and, therefore, must be construed beneficially to the mortgagor, and strictly against the mortgagee, who is in the position of a grantor as regards them. Then it being impossible to reconcile a tenancy at will, that is, a tenancy determinable at the will of the mortgagee, under which the latter can, at any time, take possession, with a provision, though in form but a mere personal covenant, that the mortgagor shall remain in quiet possession until default in payment; one or the other of these two clauses must necessarily give way, and upon the principle of construction just stated, it is clear that this must be the attornment clause being less beneficial to the mortgagor. It is no answer to this argument to say that the tenancy at will can subsist with the collateral personal convenant of the mortgagee not to take possession until default, for such a covenant would be enforced specifically by a court of equity, which would restrain the mortgagee from taking possession in violation of its terms, and thus there would arise a direct repugnancy between such a provision and a tenancy at will. Mr. Justice Strong went on to say, at p. 704:
Then, the tenancy at will created by express words in the attornment clause being thus rejected we have only to deal with the provision that the mortgagor shall hold until default in payment of principal or interest at the times stipulated in the deed; if any tenancy is created it must be by that clause. Now, when I say that this clause is in the nature of a redemise, I do not mean to say that it creates a strict legal tenancy, that it confers upon the mortgagor a chattel interest amounting to a legal term, for it has been determined—and upon long established principles of the law relating to leases and terms for years, it could not be otherwise held—that the uncertainty in the duration of the term is fatal to such a construction, though, as I have before said, the covenant is one which a court of equity would undoubtedly enforce by restraining the mortgagee from ejecting the mortgagor before default.
The italics are my own.
I think that at the very least the interest taken by the appellants in the present case was a demise secured by a covenant for quiet possession which a court of equity would undoubtedly enforce by restraining Benvenuto from ejecting any of them before default, and as the second mortgagee and its assignee Stein and the respondent who took his assignment without consideration, must all be taken to have had full knowledge of all the circumstances, including the covenant for quiet possession, I conclude that the respondent was bound by that covenant which is enforceable at equity by restraining him in the same manner as it would have been enforceable against Benvenuto.
Not only must the respondent be taken to have had notice of the interests of the appellants, but the appellants were in actual occupation of their suites when the second mortgage was given, and in this regard reference may be had to the case of Barnhart v. Greenshields[3], decided in the Privy Council in 1853, which appears to be accepted as a modern authority. (See Halsbury’s Laws of England, 3rd ed., vol. 14, p. 546 and vol. 34 at pp. 303 and 366, and Hanbury’s Modern Equity, 8th ed., at p. 33.) In that case at p. 33 their Lordships accepted the statement of the rule governing such circumstances as made by Sir James Wigram in the case of Jones v. Smith[4], where he said:
If a person purchases an estate which he knows to be in the occupation of another than the vendor, he is bound by all the equities which the party in such occupation may have in the land…for possession is prima facie evidence of seisin in fee. The exact factual situation in the present case appears to be a unique one and an extensive search of the authorities has not resulted in the discovery of any decided cases which characterize the exact interest acquired by the purchasers in terms of any of the categories heretofore accepted by the courts, but it appears that similar situations have arisen in the United States and have given rise to a comment in a work entitled The Influences of the Metropolis on the Concepts, Rules and Institutions Relating to Real Property, 1954; which is quoted in an article in 18 Stanford Law Review at p. 1328 as follows:
In some of these cases the question has arisen as to the extent and quality and legal character of the interest which is possessed by a purchaser of a co-operative apartment who is commonly called a ‘tenant owner’. The question remains largely unanswered. Some of the courts in discussing the question have expressly refused to give the interest a name, while others have used the designations ranging from ‘tenancy’ through ‘equitable title’. Apparently there has arisen in the field of real property a type of interest, peculiar to the co-operative apartment concept, which does not fit precisely in any of the ancient legal pigeonholes and which is not fully or adequately defined by existing legal terminology
The learned trial judge expressed the opinion that the appellants
…are licensees with a contractual right to exclusive possession of the apartments which they occupy so long as they retain the shares and comply with the terms of the agreement; and to sell such shares to a purchaser with the approval in writing of the Board of Directors of the Company and to assign to such purchaser all their rights under the Agreement with the Company, including the right to use and occupy the accommodation covered by the agreement.
In support of this proposition, reference was made to the case of Errington v. Errington[5], but I take the facts of the present case as being more favourable to the appellants than they were to the licensees in that case, and I think that what each of the appellants acquired by way of purchase was an equitable title to the exclusive right of occupancy of their respective suites and to quiet possession thereof so long as they remained the owner of the shares allotted to them in Benvenuto and were not in default under the terms of the agreement and lease.
It appears to me to be fitting at this point to make reference to the fact that in the course of purchasing their exclusive rights of occupancy, although the appellants ap- pear to have been dealing with three different entities, they were in fact dealing with only one controlling mind, namely that of Alfonso Frisina. Mr. Frisina incorporated Benvenuto and all its original five shares were held by or for him. This was the company to which he eventually conveyed the apartment house and with which the appellants entered into their agreements for exclusive occupancy of the suites. Frisina also incorporated Frisina Enterprises which was destined to become the second mortgagee and which ultimately assumed a number of administrative obligations in respect of the apartment building.
Mr. Justice Laskin said in the course of his reasons for judgment that this method of doing business was “a permissible device” and there can be no quarrel with this description. It was certainly a device and it was a permissible one having regard to the rule in Salomon v. Salomon & Co.[6] It is no part of my reasoning that the corporate veil should be pierced, and at this stage I am only referring to Frisina’s method of operation in order to make it plain that at all times each of Frisina, Benvenuto and Frisina Enterprises knew exactly what the other was doing and no undertakings were made by one without the knowledge of the others. It is also significant to note that Frisina Enterprises, which was controlled by Frisina, was designated by him as the second mortgagee and it is to be appreciated that Mr. Stein, to whom Frisina Enterprises and Frisina assigned the second mortgage, took it with full knowledge of all the dealings between the Frisina companies and the appellants and that the present respondent is in this regard in the same position as Stein.
As I have indicated, I think that the question of priority is dependent upon the nature of the interest vested in Benvenuto at the time when the second mortgage was executed on March 31, 1960, and as I have said, I think it to be apparent that on that date when Frisina executed the deed to Benvenuto he had, in concert with that company and in accordance with the terms of the agreement of sale, already divested himself of the interest conveyed to the appellants and that this was well known and accepted by Frisina Enterprises and by the successive holders of the second mortgage. It follows, in my view, that the interests conveyed to the appellants were no longer Benvenuto’s property to mortgage, and that the property mortgaged to Frisina Enterprises was then encumbered to the extent of the suites which it had sold.
It was argued on behalf of the respondent that the fact that the forms of “agreement and lease” which were not signed until April 1 or later and which each contained a recital specifying the amount of the second mortgage should, having regard to para. 12 thereof, be treated as replacing any previous agreement and as acknowledging the priority of the Frisina Enterprises’ mortgage. There appears to me to be a number of answers to this contention. In the first place the “agreement and lease” which was finally signed contained all the same covenants as the document which was attached to the original offer to purchase, including the stipulation that the proprietary lessees were “to be entitled to exclusively use and enjoy the apartment suite set opposite his or her name” and the covenant for quiet possession of the suites and I think that these covenants must be treated as evidencing the recognition by all concerned that the mortgage referred to in the recital was a mortgage of property from which the interest of the proprietary lessees had already been carved out. In this regard it is to be remembered that the second mortgage was dated one day before the signed forms of “agreement and lease” and that it was not recorded until twenty-six days later.
In the second place, it is to be noted that the mortgagee was not a party to the “agreement and lease” and it is difficult to understand how its successor can invoke this document in aid of his claim to priority.
I think it should be noted also that the only mention of the contemplated second mortgage in the original offer to purchase was in the following terms:
…the Purchasers covenant and agree that they will not in any manner whatsoever, alienate or encumber or cause to be alienated or encumbered, the said lands and premises, or any part thereof, prior to the date upon which the full proceeds of the said mortgage, including any holdback have been received by the Vendor Company and the second mortgage, referred to in the said form of agreement and lease attached hereto, has been registered.
(The italics are my own.) It is difficult to give any clear meaning to this language without concluding that the vendor and the purchasers recognized that the interest which was conveyed was one which was capable of and could be “alienated or encumbered” and that the purchasers were agreeing not to alienate or encumber their interests until the first mortgage had been fully advanced and the second mortgage had been registered. In my view this presupposes the conveyance to the purchasers of an equitable interest in the apartment building which vested in them prior to the execution and registration of the second mortgage. When this language is considered in conjunction with the various agreements which were entered into for the purpose of implementing the Frisina scheme for selling the apartment suites, it appears to me to confirm the view that Benvenuto had divested itself of the exclusive right to occupy the suites which it sold before it entered into the second mortgage.
Although, no evidence was given at the trial by either the respondent or his partner, Mr. Samuel Stein, the letter written by their law firm to Benvenuto on March 29, 1962, clearly indicates that they recognized the prior interests of the appellants over the second mortgage which was then held by Stein. The first paragraph of that letter reads as follows:
We wish to advise you that we act for the second mortgagee on the above-mentioned property and inasmuch as the second mortgage is encumbered with collateral agreements covering the sale of the co-operative apartments, we feel that we must request copies of the yearly financial statements of the Hamilton Benvenuto Apartments Limited.
The italics are my own.
In my view the matter could not have been put more accurately and I conclude that everybody concerned recognized that the second mortgage was encumbered in the manner described in this letter.
In the course of his reasons for judgment, Mr. Justice Laskin gave expression to the opinion that even if the appellants had such an equitable interest, their title was nonetheless subject to Frisina’s prior equitable interest as unpaid vendor. In this regard Mr. Justice Laskin said:
Even if it be assumed that the defendants have an equitable interest by reason of their contractual licences to occupy certain apartment suites, Frisina had a prior equitable interest, an equitable charge as unpaid vendor, under the agreement for sale of June 15, 1959: see Cave v. Cave (1880), 15 Ch. D. 639. An equitable charge arises in favour of the unpaid vendor of an equitable estate which he has agreed to sell no less than in the case of an agreement of sale of a legal estate. Further, the defendants had notice of this prior interest (commonly, although not quite accurately, called a vendor’s lien) which must, on this ground at least, rank ahead of their own. The present case does not compel a determination whether the contractual licences should be given the dignity of equitable interests in land or whether they should be regarded, at best, as mere equities which must be either personal as between the parties or might enjoy a farther reach but short of binding a subsequent purchaser for value and certainly short of binding a subsequent purchaser for value without notice. I refer in this connection to a recent consideration of