Hongkong Bank of Canada v. Wheeler Holdings Ltd.

DEFINITIONS

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(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.

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.

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.

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.

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.