Supreme Court of Canada
Lottman et al. v. Stanford et al., 1980 CanLII 32 (SCC), [1980] 1 SCR 1065
Joseph Lottman and Judy Teichberg Appellants;
and
Sam Stanford and Harry Ungerman Respondents;
Emma Lottman Respondent.
1979: March 21, 22; 1980: January 29.
Present: Martland, Ritchie, Dickson, Estey and McIntyre JJ.
ON APPEAL FROM THE COURT OF APPEAL FOR ONTARIO.
Wills—Construction—Rule in Howe v. Earl of Dartmouth—Applicability to realty—Duty of trustees.
Trusts and trustees—Conversion of real property of residue—Rule in Howe v. Earl of Dartmouth—Duty of trustees.
The issue was the application in Ontario of the rule in Howe v. Lord Dartmouth (1802), 7 Ves. Jr. 137, 32 E.R. 56, i.e. where residuary personalty is settled on death for the benefit of persons who are to enjoy it in succession, the duty of the trustees is to convert all such parts of it as are of a wasting or future or reversionary nature, or consist of unauthorized securities, into property of a permanent and income bearing character.
After the usual revocation of earlier wills and the appointment of executors and trustees the deceased gave all his property to his trustees upon trust to pay debts, funeral and testamentary expenses and death taxes, and to deliver certain specific assets to his son Joseph, his daughter Judy and his wife Emma with directions to convert assets in the trustee’s absolute discretion and to keep invested the residue of the estate, paying the net income therefrom to his wife with discretion to make certain payments for her out of capital. On the death of his wife the residue of the estate was to go to his four children in equal shares. The testator died in 1972 leaving a $341,000 estate of which some $285,000 was real property. For the period of almost three years, to December 31, 1975, the widow as life tenant had received only $7,000. She sought relief by way of originating motion. The motion, opposed by two remaindermen, was dismissed in weekly court where the judge left open the question of whether the rule in Howe v. Lord Dartmouth applied in Ontario to real property while
[Page 1066]
holding that it could not apply on the facts here as the real property in question was neither unproductive nor wasting. The Court of Appeal however held that the rule did apply, that the executors were under a duty to convert and a sale of the real property was directed.
Held: The appeal should be allowed.
The rule in Howe v. Lord Dartmouth is a rule requiring the trustee of an estate to deal even handedly between the life tenant and the remaindermen and operates to compel a conversion of wasting or unproductive personalty and the investment of the proceeds. A corollary rule is the rule In re Earl of Chesterfield’s Trusts (1883), 24 Ch. D. 643, which relates to the apportionment between capital and income of the proceeds of the conversion between life tenant and remaindermen.
The restriction of the rule in Howe v. Lord Dartmouth to personal property is a rule of long standing and must be presumed to be known to those engaged in the preparation of wills. Rules dealing with estate administration of this nature should not be changed unless there is a positive reason for so doing and in such a case should be done by the legislature which has the power to enact any necessary transition and protective provisions to avoid interference with existing trusts and with rights and obligations acquired and undertaken upon the reasonable expectation that there would be some degree of certainty in the law. Courts must not twist rules such as that in Howe v. Lord Dartmouth to interfere with testamentary dispositions for the purpose of remedying supposed injustice.
As to the claim by the widow for “notional income” in the form of a percentage of the value of the unconverted real property, Lauer v. Stekl (1974), 1974 1391 (BC CA), 47 D.L.R. (3d) 286 aff’d 1975 142 (SCC), [1976] 1 S.C.R. 781, has no operation here where there is no duty upon the trustees to convert the realty and the rights of the widow subject to any power in the trustees to encroach upon capital for her benefit are limited to the receipt of the actual income earned by the real property.
Howe v. Earl of Dartmouth (1802), 7 Ves. Jr. 137, 32 E.R. 56, considered; Royal Trust Company v. McMurray and Crawford, 1955 36 (SCC), [1955] S.C.R. 184; In re Earl of Chesterfield’s Trusts (1883), 24 Ch. D. 643; In re Lauer
[Page 1067]
and Stekl (1974), 1974 1391 (BC CA), 47 D.L.R. (3d) 286 (B.C.C.A.) aff’d (1975), 1975 142 (SCC), 54 D.L.R. (3d) 159, [1976] 1 S.C.R. 781; In re Cameron (1901), 2 O.L.R. 756; Re Clark (1903), 6 O.L.R. 551; Re Prime (1924), 25 O.W.N. 522; Re Pears (No. 1) (1926), 31 O.W.N. 235; Re Rutherford, 1933 112 (ON CA), [1933] O.R. 707; Re Bingham (1930), 1930 360 (ON SC), 66 O.L.R. 121; In re Woodhouse, [1941] Ch. D. 332, referred to.
APPEAL from a judgment of the Court of Appeal for Ontario1 allowing an appeal from a judgment of Galligan J.2 dismissing an action by way of originating motion by widow and life tenant. Appeal allowed, judgment at trial restored.
D.K. Laidlaw, Q.C., for the appellants.
P.D. Isbister, Q.C., and D. Hager, for Emma Lottman, respondent.
Martin R. Kaplan, for the respondents Stanford and Ungerman and the executor Guaranty Trust Co. of Canada.
The judgment of the Court was delivered by
Introduction
MCINTYRE J.—This appeal concerns the application in Ontario of the rule in Howe v. Lord Dartmouth3. Adopting the words found in Hanbury’s Modern Equity, 4th ed., at p. 241, Kerwin, C.J.C., in Royal Trust Company v. McMurray and Crawford4, at p. 185, expressed it in these terms:
Where residuary personalty is settled on death for the benefit of persons who are to enjoy it in succession, the duty of the trustees is to convert all such parts of it as are of a wasting or future or reversionary nature, or consist of unauthorized securities, into property of a permanent and income bearing character.
The Ontario Court of Appeal applied the rule in the case at bar directing the conversion by the trustees under the will of the deceased Sam Lottman of what it found to be non-productive real property. This appeal is against that judgment.
[Page 1068]
Facts
The deceased left a will the significant parts of which are set out hereunder. After the usual revocation of earlier wills and the appointment of executors and trustees, he gave all his property to his trustees upon trust to pay debts, funeral and testamentary expenses and death taxes, and to deliver certain specific assets to his son Joseph, his daughter Judy, and his wife Emma, and then directed the trustees in clause III(d):
To sell, call in and convert into money all of my personal estate at such time and in such manner and upon such terms as my Trustees at their absolute discretion determine, with power to them to postpone such conversion of the whole or any part of such estate for such length of time as they shall think best;
and in clause III (g):
To keep invested the residue of my estate, and to pay the net income derived therefrom to or for my wife, EMMA LOTTMAN, provided she survives me for thirty (30) days. My Trustees shall have the power at any time and from time to time, in their discretion, to pay or expend on behalf of my said wife for medical, hospital or nursing expenses, or other expenses of a similar emergent nature, such amount or amounts out of the capital of the residue of my estate as may be necessary or as they may deem advisable;
He gave the residue of the estate, upon the death of the last survivor of the testator and his widow, to his four children in equal shares providing that the issue of the deceased children would take, by substitution, the shares of the deceased parents.
The deceased died on March 9, 1972, leaving an estate with a gross value, after a re-evaluation imposed by the succession duty authorities, of some $341,000. Of that total, approximately $285,000 was represented by real property and the remainder made up of personalty. The residue of the estate, after the settlement of duties, consisted of the real property known as 177-181 Baldwin Street and the remaining proceeds of the sale of another parcel of real property known as 172 Baldwin Street. The one remaining piece of land, 177-181 Baldwin, is subject to a lease to one
[Page 1069]
Joseph Lottman, a son of the deceased, for a period of ten years from September 10, 1972, with a provision for renewal for ten years at an annual rate of $4,800. This sum is less than the annual taxes. During the period from the date of death until December 31, 1975, the widow, Emma Lottman, as life tenant under the will, had received on account of income for this period of almost three years, the sum of $7,000.
Procedural History
The widow, being dissatisfied with the income she was receiving from the trustees, commenced proceedings by way of originating notice of motion dated February 2, 1977, asking for relief under various heads. The motion was opposed by Joseph Lottman and Judy Teichberg, two remaindermen. The only two claims involved in this appeal are for a direction that “the executors carry out forthwith the trust for sale set forth in clause III(d) of the will of the deceased” and for a declaration that the widow “is entitled to have paid to her six per cent of the value of the said assets (that is, those unconverted) of the estate determined at the expiration of one year from the death of the said deceased and payable from the date of his death until her death”. The argument before this Court was concerned largely with the first claim involving the rule in Howe v. Lord Dartmouth, supra.
The motion came on for hearing in weekly court and on June 13, 1977, Galligan J. gave judgment dismissing the motion. He left open the question of whether the rule in Howe v. Lord Dartmouth applied in Ontario to real property but he held it could not apply to the facts of this case because, in his view, the real property in question was neither unproductive nor wasting.
In the Court of Appeal, McKinnon and Wilson JJ.A. (Weatherston J.A. dissenting), the appeal was allowed. It was held, applying the rule in Howe v. Lord Dartmouth to the real property concerned, that the executors were under a duty to convert and a sale of the real property was directed. The executors were further directed to invest
[Page 1070]
the proceeds of sale in authorized investments and to pay the appellant widow the income therefrom during her lifetime. It was also ordered that pending conversion of the real property the widow would have a charge upon the property “such charge being seven per cent of the value of the said properties as of one year from the date of the testator’s death and payable from the date of the testator’s death to the date of the actual conversion, less the amount of any income actually paid to the appellant during the specified period from the properties in question”.
In argument before this Court, counsel for the appellant took the position that the sole issue was whether the rule in Howe v. Lord Dartmouth applied to compel a conversion of real property in Ontario. It was said further that even if the rule applied to real property it could not affect this case since no finding could reasonably be made that the land was either wasting or non-productive. The respondent widow adopted the judgments of the majority of the Court of Appeal, particularly that of Wilson J.A. She contended that on a reasonable interpretation of the will one could find the power to convert and, failing that, the equitable duty of the trustee to act even handedly between the life tenant and the remaindermen required the conversion of the unproductive realty and justified the application of the rule.
In her judgment, Wilson J.A. said:
The two rules of equity, the Rule in Howe v. Lord Dartmouth (supra) and its corollary, the Rule in re Earl of Chesterfield’s Trusts (1883), 24 Ch. D. 643 do not proceed on any presumed intention of the testator that the property must be converted. These rules prescribe that, where the residue of an estate is left to persons in succession, i.e., to a life tenant and remaindermen, such parts of the estate as are of a wasting character or a reversionary or unproductive nature must be realized by the trustees and the proceeds invested in authorized investments unless the will shows a contrary intention.
[Page 1071]
She accepted the view, well settled in the authorities, that the rule in Howe v. Lord Dartmouth requires a trustee to deal even handedly between a life tenant and a remainderman by converting wasting or unproductive assets and investing the proceeds of conversion in trustee or, where authorized in the will, other permitted investments. This step enables all interests to be protected and the assets preserved so that the benefits provided for in the will may pass in succession to the respective beneficiaries. She disposed of the contention of the remaindermen that the rule had no application to real property in these words:
It is true that the English courts have confined the application of the Rule in Howe v. Lord Dartmouth to personal estate: In re Woodhouse [1941] Ch. 332. Accordingly, a life tenant under an English will has no claim to any part of the proceeds of sale of unproductive real estate. Conversely, even if the will directs a sale of the real estate, the life tenant in England is entitled to all of the income produced by it until it is sold. There is no apportionment in either case. Mr. Sheard, however, directed us to a number of Ontario authorities in which the rule was applied to unproductive real estate: In re Cameron (1901), 2 O.L.R. 756; Re Clarke (1903), 6 O.L.R. 551; Re Prime (1924), 25 O.W.N. 522; Re Pears (No. 1) (1926), 31 O.W.N. 235; Re Rutherford 1933 112 (ON CA), [1933] O.R. 707, [1933] 4 D.L.R. 222 (C.A.). Even if our courts were on a frolic of their own in applying the rule to real estate, which indeed it seems they were, it was in my opinion a frolic which reflected a contemporary Canadian attitude to property. Real estate is not a “sacred cow” in Canada as it was in England when these equitable rules were developed. Sale of the family hereditaments is not fraught with the same trauma and disgrace. I see no reason why in the current social context in Canada a trustee’s powers and duties in relation to realty should be any different from his powers and duties in relation to personalty. I would therefore in an appropriate case apply the rule to unproductive or under-productive real estate. Real estate may, I believe, be properly viewed by the trustees as under-productive if the income received from it and
[Page 1072]
the rate of return on authorized investments is so disparate that it is unfair to the life tenant that it be retained.
While expressing some qualification on another question not now in contention on this appeal, McKinnon J.A. agreed with Wilson J.A.
Analysis
The rule in Howe v. Lord Dartmouth, as has been pointed out, is a rule requiring the trustee of an estate settled in succession to deal even handedly between the life tenant and the remaindermen. It operates to compel, where its operation is not excluded by the testator, a conversion of wasting or unproductive personalty and the investment of the proceeds of such conversion in trustee investments. By this means the life tenant is assured of an income from the assets of the estate and the capital of the estate is preserved for the remainder interests upon the demise of the life tenant. Corollary to that rule is the rule In re Earl of Chesterfield’s Trusts5. It relates to the apportionment between capital and income of the proceeds of the conversion between the life tenant and the remaindermen and is called into play as a result of a conversion of estate assets resulting either from the application of the rule in Howe v. Lord Dartmouth or from an express provision in the will. However, with the greatest of deference, I do not agree with Wilson J.A. that the rule may be applied in this case.
It will be observed that clause III(d) of the will contains a direction to convert the personal estate at the discretion of the trustees. Clause III(g) directs the investment of the residue. There is therefore no room for the operation of the rule which is wholly unnecessary where a specific direction to convert is given: see In re Lauer and Stekl6. In the case at bar, the personal estate is subject to a direction requiring conversion and, in that respect, recourse to the rule is therefore unnecessary. As far as the real property is concerned, the rule in Howe v. Lord Dartmouth has never been extended to real property. All the authorities and text writers to which I have been referred and
[Page 1073]
which I have been able to discover emanating from common law jurisdictions (excepting the United States of America) confine its operation to personalty. Wilson J.A., in the passage above quoted, recognized this proposition, but was of the view that an exception had been made in the Province of Ontario. She cited various authorities but again, and with the utmost respect, I am of the opinion that none of the cases she cited is authority for the proposition that the rule in Howe v. Lord Dartmouth applies to real property in Ontario. In re Cameron7, was a case turning upon the application of the rule in the Earl of Chesterfield’s Trusts regarding the apportionment between income and capital and in so far as conversion of real property was concerned it resulted not from the operation of any rule of equity but from the direction in the will to set apart the sum of $50,000 out of the estate; Re Clark8 was a case where the will gave a power to sell both real and personal property; Re Prime9 was a case where the will provided an express duty to convert real and personal property; Re Pears (No. 1)10 was a case where the will gave a power to convert the residue with a power to postpone leaving no room for the application of the rule; Re Rutherford11 was a case where the will gave an express duty to convert. A further case mentioned in argument, Re Bingham12 adds no force to the contention that the rule has been applied in Ontario, for a direction in the will in that case authorized the conversion of “so much of my property as may be necessary for the purpose of carrying into effect the provisions of this my will”. These cases are not illustrations of the application of the rule in Howe v. Lord Dartmouth requiring the conversion of real property. In each case the conversion, in so far as it applied to real property, resulted from a direction in the will. These cases all deal with the apportionment between capital and income of the proceeds of such conversion and, in so far as they depart from older authority, they do so by applying principles of apportionment of the nature applied in the Earl of Chesterfield’s
[Page 1074]
Trusts13 to the proceeds of real property contrary to the law in that regard in England: see In re Woodhouse, Public Trustee v. Woodhouse14.
The question then arises whether new ground should be broken here and whether the operation of the rule in Howe v. Lord Dartmouth should be extended to real property. Wilson J.A.’s views are expressed in her judgment and reproduced above. I am not, however persuaded that we should on this point venture into the field of judicial legislation so boldly. To begin with, the restriction of the rule in Howe v. Lord Dartmouth to personal property is itself a rule of long standing. It must be presumed that those engaged in the preparation of wills and the settlement of trusts under wills know and understand, and have known and understood, its operation and effect and have planned and set in motion many trusts under wills upon the premise that the rule will continue to apply in relation to personal estate but not real estate. Great inconvenience could be caused to many existing trust arrangements by a sudden extension and, in my view, this is not a step which should be taken in this fashion. This is not to say that old rules may never be changed, but rules dealing with estate administration of this nature should not be changed unless there is a positive reason for so doing. In such case, it should be done by the legislature which at the same time has the power to enact the necessary transition and protective provisions to avoid interference with existing trusts and with rights and obligations acquired and undertaken upon the reasonable expectation that there would be some degree of certainty in the law.
Furthermore, it should be borne in mind that we are here dealing with equitable rules relating to estate administration and not with dependents’ relief legislation which enables a court to alter testamentary provisions in order to do justice between the testator and members of his family. Other legislative provisions deal with such matters
[Page 1075]
and in Ontario may be found in the Succession Law Reform Act, S.O. 1977, c. 40, particularly ss. 64 to 88. Courts must not twist rules such as that expressed in the case of Howe v. Lord Dartmouth to interfere with testamentary dispositions for the purpose of remedying supposed injustice. I would not extend the rule beyond its present limits. Such a step should be left to the legislature when and if it should consider it advisable.
In view of the foregoing, it is unnecessary to deal with the question raised as to whether the real property in question is productive or wasting.
Notional Income
The remaining point involves the claim by the widow for what may be termed a notional income in the form of a percentage of the value of the unconverted real property. The case of Lauer and Stekl, supra, is relied upon to support this claim. Lauer and Stekl cannot assist the widow here. In that case, the trustees were under a duty to convert all the assets of the estate, with a power of postponement. That case held that in such a situation the life tenant was entitled to a notional income based on a percentage of the value of the unconverted real property during the period of postponement. It has no operation here where there is no duty upon the trustees to convert the realty and, therefore, the rights of the widow, subject to any power in the trustees to encroach upon capital of the estate for her benefit, are limited to the receipt of the actual income earned by the real property.
Disposition
I would accordingly allow the appeal, set aside the judgment of the Court of Appeal, and restore the judgment of the trial judge dismissing the motion. I would allow the appellants their costs throughout payable out of the estate.
Appeal allowed, costs payable from the estate.
Solicitors for the appellants: McCarthy & McCarthy, Toronto.
[Page 1076]
Solicitors for the respondents Stanford and Ungerman: Siegal, Fogler, Toronto.
Solicitors for the respondent Emma Lottman: Lash, Johnston, Toronto.
Footnotes
- (1978), 2 E.T.R. 1.
- (1977), 1 E.T.R. 11.
- (1802), 7 Ves. Jr. 137, 32 E.R. 56.
- 1955 36 (SCC), [1955] S.C.R. 184.
- (1883), 24 Ch. D. 643.
- (1974), 1974 1391 (BC CA), 47 D.L.R. (3d) 286 (B.C.C.A.) aff’d (1975), 1975 142 (SCC), 54 D.L.R. (3d) 159, [1976] 1 S.C.R. 781.
- (1901), 2 O.L.R. 756.
- (1903), 6 O.L.R. 551.
- (1924), 25 O.W.N. 522.
- (1926), 31 O.W.N. 235.
- 1933 112 (ON CA), [1933] O.R. 707.
- (1930), 1930 360 (ON SC), 66 O.L.R. 121.
- (1883), 24 Ch. D. 643.
- [1941] Ch. D. 332.