Hongkong Bank of Canada v. Wheeler Holdings Ltd., 1993 CanLII 148 (SCC), [1993] 1 SCR 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), 1963 CanLII 591 (MB QB), 39 D.L.R. (2d) 579 (Man. Q.B.), aff'd (1963), 1963 CanLII 645 (MB CA), 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), 1962 CanLII 391 (BC CA), 36 D.L.R. (2d) 499; Re Morris and Morris (1973), 1973 CanLII 1200 (MB CA), 42 D.L.R. (3d) 550; Re MacDonald and Law Society of Manitoba (1975), 1975 CanLII 1138 (MB QB), 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 CanLII 48 (SCC), [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), 1984 CanLII 3082 (NL CA), 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), 1921 CanLII 514 (ON CA), 50 O.L.R. 211; Re Bahnsen and Hazelwood (1960), 1960 CanLII 407 (ON CA), 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].
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), 1990 ABCA 337, 77 Alta. L.R. (2d) 149, 111 A.R. 42, 75 D.L.R. (4th) 307, 14 R.P.R. (2d) 1 and (1991), 1991 ABCA 4, 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), 1989 CanLII 3174 (AB KB), 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:
- . . .
(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:
- 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).
- 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.
- 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.
- 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: 1989 CanLII 3174 (AB KB), 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: 1990 ABCA 337, 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: 1991 ABCA 4, 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
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
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.
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 clean hands unless the depravity, the dirt in question on the hand, has an immediate and necessary relation to the equity sued for." CMHC seeks to paint all respondents with the same brush, arguing that equity should deny all relief in this case because Town House and Wellington are seeking to escape obligations to CMHC. However, an entire transaction does not become tainted merely because certain parties to the transaction may have unclean hands. Town House and Wellington may be seeking to escape obligations to CMHC, but this does not taint all transactions involving properties subject to those obligations. 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.
The two numbered companies who are the purchasers under the 1988 sale agreements seek a declaration that they are the beneficial owners of the properties in question pursuant to these agreements. There has been significant debate in the literature and jurisprudence as to whether a declaration constitutes equitable relief or is a sui generis remedy and, if it is the latter, whether equitable principles should bar relief. The Chancery Courts of England had long exercised a limited jurisdiction to grant declaratory judgments, which power was expanded by the Chancery Act of 1850 (13 & 14 Vict., c. 35). With the merging of the two court systems under the Supreme Court of Judicature Act, 1873 (36 & 37 Vict., c. 66), declaratory jurisdiction was also assumed by the courts of common law. If one categorizes remedies by virtue of their origin in the Court of Chancery or the courts of common law, then, the declaratory judgment would seem to be an equitable remedy.
However, starting with the English case of Chapman v. Michaelson, [1909] 1 Ch. 238 (C.A.), a number of courts have held that the declaratory judgment does not constitute equitable relief. In Chapman, the Court of Appeal distinguished the granting of a declaration that security documents were invalid from the more common equitable remedy of delivering up of the unenforceable security documents. In the latter situation, relief was always made subject to equitable conditions of repayment being imposed on the borrower, but the court refused to impose similar conditions on a borrower granted a declaratory remedy on the grounds that the declaration "is not equitable relief" (p. 242). Although some English decisions have taken a different approach in the intervening years, the Chapman approach was reiterated in Tito v. Waddell (No. 2), [1977] Ch. 106, in which Megarry V.‑C. stated that the remedy is "neither a legal nor an equitable remedy, but statutory" (p. 259).
This view as to the nature of the declaratory remedy has largely prevailed in Australia and New Zealand. Similarly, the consensus in Canada seems to be that the remedy is sui generis rather than wholly equitable. Sarna in The Law of Declaratory Judgments (2nd ed. 1988), for example, states at p. 216 that "[t]he development of Canadian case law has seen little or no reference to the equitable nature of the remedy".
However, a number of Canadian judgments at the lower levels have applied equitable principles to those who seek a declaration. For example, in Sara v. Sara (1962), 1962 CanLII 391 (BC CA), 36 D.L.R. (2d) 499, the British Columbia Court of Appeal refused to grant a declaration that a marriage was void to a man who had polygamously married his Canadian wife in order to be admitted to the country, and then been supported by her for a number of years after his arrival, on the basis inter alia that the husband had unclean hands. Re Morris and Morris (1973), 1973 CanLII 1200 (MB CA), 42 D.L.R. (3d) 550 (Man. C.A.), and Re MacDonald and Law Society of Manitoba (1975), 1975 CanLII 1138 (MB QB), 54 D.L.R. (3d) 372 (Man. Q.B.), also take the view that the declaratory remedy is an equitable one. At least some American decisions are to the same effect, such as Campbell v. Campbell, 300 N.Y.S. 760 (Sup. Ct. 1937), and Mills v. Mills, 179 A. 5 (Conn. 1935), in which the plaintiffs were held to be disentitled to declaratory relief on the basis of unclean hands and laches, respectively.
While the above decisions all seem to have been based, expressly or impliedly, on the view that declaratory relief was equitable in nature, it appears that even if the remedy 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. As Zamir states in The Declaratory Judgment (1986), at p. 191:
This discretion is employed, as discretion was originally employed in respect of all equitable remedies, primarily to do justice in the particular case before the court. It is wide enough to allow the court to take into account virtually all objections and defences possible in equitable proceedings.
Zamir goes on to cite various English cases in which the motives of the plaintiff were taken into account, the claim was dismissed on the basis of laches, and inequitable behaviour on the part of the plaintiff was considered to be a defence to a declaratory judgment.
Some other authors take a different approach. In Equity ‑‑ Doctrines and Remedies (2nd ed. 1984), at p. 466, Meagher, Gummow and Lehane review a number of decisions and conclude that on both authority and principle, the traditional equitable barriers to relief do not apply to declaratory relief. Likewise, Sarna, supra, at p. 216, states that "there has yet to appear a serious proposal that the exercise of discretion on declaratory proceedings be confined to the general principles governing equity".
While it may be that certain equitable restrictions such as the requirement that legal remedies be insufficient and that there be a probability of irreparable or at least very serious damage should not be applied to declaratory remedies, I would conclude that in the exercise of the discretion whether or not to grant a declaration, the court may take into account certain equitable principles such as the conduct of the party seeking the relief. In the context of this case, then, the allegation that the 1988 purchasers have unclean hands should be addressed.
The only real evidence before this Court with regard to the alleged misconduct of the 1988 purchasers is 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. As well, there is the fact that shortly after the execution of the sale agreements, the sole director and shareholder of the numbered companies married the sister of the directors of Town House and Wellington. In my view, 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. With respect to the family connection, no finding was made by the courts below with respect to any scheme between the parties to defeat the rights of CMHC. Without such a finding, this fact alone is of little importance.
The only party unquestionably seeking equitable relief in this case is Hongkong, which is seeking a judicial sale in its mortgage foreclosure action. There is no evidence that Hongkong was guilty of any misconduct. Hongkong seems particularly free of suspicion of misconduct because it was not even the original mortgagee. It purchased a mortgage acquired by its predecessor in title. If Hongkong were the original mortgagee, there might be suspicion that the second mortgages had been made with the intention of intentionally defaulting in order to escape obligations to CMHC. Here there can be no such suspicion because Hongkong purchased the mortgages some five years after they were first made. There is no evidence of a plot to enter into second mortgages as part of a scheme to escape obligations to CMHC, but even if there was such a scheme Hongkong could not have been a participant. The mere fact that the relationship among the numbered companies, Town House and Wellington may arouse suspicions is not a sufficient basis upon which to deny an equitable remedy to Hongkong.
With respect to the numbered company which seeks to purchase under the judicial sale in the foreclosure action, CMHC argues that all participants in a foreclosure action, including the prospective purchasers at a court‑conducted sale, must be governed by equitable principles. In this case, it is evident that the 1989 purchaser knew of the provisions of the operating agreement, and in fact the Offer to Purchase is expressly stated to be contingent on a declaration by the court that the terms, conditions and obligations in the operating agreement will not be binding on the purchaser. Nonetheless, aside from the relationship of the 1989 purchaser to the other numbered companies and to Town House and Wellington, which will be discussed below, there does not appear to be evidence of wrongdoing on the part of the 1989 purchaser which would warrant a finding of unclean hands. As is the case with the 1988 purchasers, mere knowledge that one is participating in a transaction which constitutes a breach of a contract to which one is not a party does not seem to me to be sufficient to constitute unclean hands. Further, a review of the jurisprudence in this area fails to reveal any cases in which a judicial sale has been disallowed on the basis of the unclean hands of the proposed purchaser, which may well be a result of the fact that, as here, it is not the purchaser but the mortgagee who seeks relief from the court, even though the purchaser stands to benefit from the relief.
CMHC relied on 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.), and Colonial & Home Fuel Distributors Ltd. v. Skinners' Ltd. (1963), 1963 CanLII 591 (MB QB), 39 D.L.R. (2d) 579 (Man. Q.B.), aff'd (1963), 1963 CanLII 645 (MB CA), 46 D.L.R. (2d) 695 (Man. C.A.), aff'd [1964] S.C.R. v, in support of its contention that relief should be denied on equitable grounds. In my view, both cases are distinguishable because in both cases there was direct evidence that the very parties who were seeking equitable relief were guilty of misconduct in that they were parties to a breach of contract.
In Re Valley Vu, supra, the court refused to assist a mortgagor in obtaining a discharge of a mortgage through prepayment because the mortgagor had intentionally breached the terms of the mortgage, including a provision restraining alienation. In this case, neither Hongkong nor the numbered companies is party to a breach of contract. The only parties in breach are Town House and Wellington. In Colonial, the court refused to allow a party to use a company which was his alter ego to circumvent a restrictive covenant. In this case, there is no clear evidence and no finding that either Hongkong or any of the numbered companies were the alter egos of Town House and Wellington. I agree with Lieberman J.A.'s assessment of the respondents' relationship (at p. 168):
One can, of course, speculate about the motivation behind the parties entering into the agreements for sale and its connection or otherwise with the relationship of those parties, but without evidence to substantiate such a speculation the appellant's submission falls far short of establishing a common operating mind behind the respondent companies. There is in my view no direct evidence to establish an intention to circumvent the contractual liability of the original mortgagors, and I cannot infer such an intention. This is not a case justifying the piercing of the corporate veil.
The relationship between the numbered companies and Town House and Wellington is undoubtedly suspicious, but without direct evidence it is impossible to conclude that they jointly acted to free Town House and Wellington of their obligations towards CMHC.
The numbered companies do seek to avoid the CMHC operating agreement but in so far as the terms of the operating agreement are incorporated into the mortgages, which is the extent the statute contemplates, CMHC retains the right to accelerate the loan or increase the interest rates. Thus even if Hongkong is granted the equitable relief which it seeks, CMHC is not left without a remedy for breach of its operating agreements.
I therefore conclude that there is no basis for refusing equitable relief or declaratory relief to the respondents on the "clean hands" principle.
2. Illegality
CMHC's foremost argument against the transactions was that the second mortgages and the 1988 sale agreements were illegal contracts. CMHC argued that these contracts were contrary to the public policy set out in the National Housing Act. In my view, the National Housing Act does not prohibit the transactions in question. As a result, this ground of attack fails.
At the time of the operating agreements, sale and disposition of mortgaged properties were referred to in s. 16(4)(g) of the National Housing Act, 1954, which read as follows:
- . . .
(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 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;
This provision was repealed and replaced by the Act to amend the National Housing Act, 1954, S.C. 1968‑69, c. 45, s. 7. The replacement to s. 16(4)(g) now appears as s. 26(3)(b) of the National Housing Act, R.S.C., 1985, c. N‑11. The wording of s. 26(3)(b) differs somewhat from that of s. 16(4)(g), but it is not materially different for the purposes of the issue of illegality, and the parties referred in their submissions to s. 16(4)(g). For ease of reference, I will therefore refer to s. 16(4)(g).
CMHC cited Cheshire, Fifoot and Furmston's Law of Contract (12th ed. 1991), at p. 349, for the proposition that a contract which is expressly or impliedly prohibited by statute is illegal and therefore void. In my view, s. 16(4)(g) neither expressly nor impliedly prohibited the second mortgages and the 1988 sale agreements.
The prohibition contained in s. 16(4)(g) is not express. Indeed, CMHC did not contend that s. 16(4)(g) expressly prohibits the contracts in question. I cannot read s. 16(4)(g) as doing anything more than requiring CMHC to obtain contractual restraints on disposition. The whole of s. 16 is directed towards the terms to be incorporated in the contract. It is impossible to read such a provision as an express statutory restraint on disposition.
I am also of the opinion that s. 16 does not contain an implied prohibition of the transactions in question. Interpreting s. 16 as creating an implied statutory restraint on disposition would deprive Hongkong of its mortgages and the 1988 purchasers of their title, in the absence of CMHC's consent. Such a deprivation of property rights is not lightly implied.
CMHC argued that the second mortgages and the 1988 sale agreements violated the policy of the National Housing Act. However, I view the policy of the National Housing Act differently. The policy of the National Housing Act is to place the governing arrangements in a contract between the mortgagor and mortgagee. CMHC then takes its security and protects itself in accordance with the provincial law applicable to the property. In some instances provincial legislation has been enacted to exclude the general law from applying to projects under the National Housing Act. For example, s. 43 of the Law of Property Act, R.S.A. 1980, c. L‑8, exempts National Housing Act mortgages from some of the restrictive provisions of that statute. Moreover, s. 16(4)(h) of the National Housing Act, 1954 stipulates a special remedy for breach, namely acceleration of the loan or increasing the rate of interest. 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.
It is common ground that the second mortgages and the 1988 sales are subject to the CMHC mortgages. Hongkong can only dispose of the mortgagor's equity, and the 1988 purchasers take subject to the CMHC mortgages. The fundamental question is whether the contractual provisions can be enforced against strangers to the contract. Section 16 clearly applies to CMHC, directing the conditions under which it must operate. It does not purport to apply to the mortgagors, let alone third parties. In my view 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. The Court of Appeal held that the operating agreement did not create covenants running with the land. CMHC, in its factum, stated that it "did not argue that the clauses preventing sale or mortgage "run with the land", nor that they are "rights in rem"" (emphasis in original). This is not, therefore, an issue in this appeal.
We must remember that the Act contemplated transactions taking place under provincial property law, the granting of a mortgage securing the loan. If CMHC's argument is correct, a federal statute would be imposing real property restraints without regard to the provincial real property regime. One cannot lightly conclude that Parliament, having spoken in terms of contracts and mortgages, intended to create restraints that are inconsistent with the common law and the Torrens system of title holding.
Furthermore, 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 prohibits 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. Under s. 92 of the Constitution Act, 1867, Parliament has no jurisdiction to legislate with respect to property and civil rights in a province. Without deciding the point, there would at least be a serious question about the validity of a federal statute creating a restraint on alienation. By requiring the arrangements to be created by contract, Parliament avoided any doubts about the validity of s. 16. Since the express words of Parliament appear to have been employed to avoid any constitutional challenge, it would be unwise to adopt an interpretation of those words which is not only strained but also creates the difficulty which Parliament avoided.
For these reasons, I conclude that s. 16 does not prohibit the second mortgages and the 1988 sales, either expressly or impliedly. Section 16 does not create a statutory restraint on alienation. Accordingly, the constitutional question does not arise and need not be answered.
3. Corporate Ultra Vires
CMHC's next argument against the transactions was that the second mortgages were ultra vires the corporate powers of Town House and Wellington. In my view, the second mortgages were not ultra vires and accordingly this ground of attack fails.
At first glance, it seems somewhat surprising that a corporate ultra vires argument is raised in this appeal, given that the corporate ultra vires doctrine has now all but disappeared. The ultra vires argument arises because Town House and Wellington were incorporated under the Companies Act which was still in force at the time of the second mortgages. Town House and Wellington were accordingly still subject to the corporate ultra vires doctrine at that time.
The appellant did not argue the ultra vires issue with respect to the 1988 sales in its factum, but by a letter to the Court after the hearing, counsel for CMHC suggested that these transactions could still be analyzed in light of the ultra vires doctrine as this doctrine had not been abolished by the Alberta Business Corporations Act, and that, further, the actions of the officers of Town House and Wellington in making the 1988 sale agreements were ultra vires the officers as not being in furtherance of objectives set out in the Articles of Continuance. However, it has been well‑established that the doctrine of ultra vires as it stood under the Companies Act was abolished by s. 15(1) of the Alberta Business Corporations Act (see, for example, the recent decision of Iacobucci J. in Communities Economic Development Fund v. Canadian Pickles Corp., 1991 CanLII 48 (SCC), [1991] 3 S.C.R. 388). As will be discussed more fully below, the fact that the Articles of Continuance state that the businesses to be carried on by the corporations are subject to the provisions of the National Housing Act is not sufficient to find the sale agreements or mortgages ultra vires according to the doctrine as it existed under the Companies Act, much less under the Business Corporations Act.
It was also submitted that the combined effect of s. 117(2) and s. 18 of the Business Corporations Act, which require that the directors and officers comply with the Act, articles and by‑laws but protect third parties without notice from the consequence of non‑compliance, rendered the transactions ultra vires. These provisions are simply a statutory indoor management rule and do not, as the appellant suggests, govern the situation where a third party such as CMHC claims that a transaction between the corporation and another party should be held void on the basis of non‑compliance with the articles. There is therefore no basis upon which to find the 1988 sale agreements to be ultra vires Town House and Wellington.
The objects of Town House and Wellington are identical and read as follows:
(a) To acquire land for building purposes and to lay out building lots and to clear and improve the same in any manner, to construct, purchase, hold, enjoy and manage low rental housing projects consisting of two or more one‑family dwellings or one or more multiple family dwellings or a combination of one family or multiple family dwellings; and in connection with the foregoing to purchase, lease, construct, develop, hold, enjoy, manage, improve and assist in improving any and all properties owned or controlled by the Company, recreational and educational facilities, commercial space or buildings including retail stores, shops, offices and other community services in connection with low rental housing projects.
(b) In connection with the foregoing to deal in building material of all kinds and description and carry on business as general contractors.
Thus the objects of Town House and Wellington do not expressly authorize them to grant second mortgages. However, the power to encumber a company's property would normally fall within the scope of s. 20(1) (h) of the Companies Act, R.S.A. 1980, c. C‑20:
20(1) For the purpose of carrying out its objects, a company other than a specially limited company has the following powers, except those of them expressly excluded by the memorandum:
(h) the power to borrow or raise or secure the payment of money in any manner the company thinks fit . . .
CMHC argued that the second mortgages do not fall within s. 20(1)(h) because of the following restriction contained in the memoranda of association of Town House and Wellington:
The objects for which the Company is established are subject to the provisions of the National Housing Act, 1954, and amendments thereto . . .
CMHC noted that there is a distinction between a company's objects, contained in the memorandum of association, and its powers, granted by s. 20 of the Companies Act. A company's powers can only be used to achieve its objects. In re Introductions Ltd., [1970] Ch. 199 (C.A.), established that the power to borrow money is not an independent object. Thus the power in s. 20(1)(h) can only be used to achieve objects contained in the memoranda of association.
It has long been recognized that the ultra vires doctrine should not be applied restrictively. Attorney-General v. Great Eastern Railway Co. (1880), 5 App. Cas. 473 (H.L.) stated at p. 478 that the ultra vires doctrine
ought to be reasonably, and not unreasonably, understood and applied, and that whatever may fairly be regarded as incidental to, or consequential upon, those things which the Legislature has authorized, ought not (unless expressly prohibited) to be held, by judicial construction, to be ultra vires.
As is noted in Palmer's Company Law (24th ed. 1987), vol. 1, at pp. 143‑44, "in modern law the courts are unlikely to hold a contract to be ultra vires the company unless, on a reasonable construction of the objects clause and the other clauses of the memorandum and articles, there are compelling grounds to arrive at that result." Such an approach is amply demonstrated by such cases as Bell Houses Ltd. v. City Wall Properties Ltd., [1966] 2 Q.B. 656 (C.A.), and In re New Finance and Mortgage Co., [1975] Ch. 420.
In Canada it is particularly important not to interpret corporate capacity restrictively, since, as discussed above, the ultra vires doctrine has been abolished in most Canadian jurisdictions, including Alberta. It would be anachronistic for the courts to interpret corporate powers narrowly when most Canadian legislatures have indicated that companies should have all the legal powers of natural persons.
Furthermore, it has long been recognized that companies generally require the ability to mortgage their property in order to undertake their ordinary business operations: see In re the Patent File Company (1870), L.R. 6 Ch. 83, and General Auction Estate and Monetary Co. v. Smith, [1891] 3 Ch. 432. Even without a statutory power such as the one contained in s. 20(1)(h), the power to mortgage is a power exercisable by most companies unless that power is expressly excluded in the memorandum of association.
Following this general approach to the ultra vires doctrine, I cannot conclude that the second mortgages were ultra vires. The corporate objects of Town House and Wellington include the ability to "purchase, lease, construct, develop, hold, enjoy, manage, improve and assist in improving any and all properties owned or controlled by the Company". The ability to raise funds by making second mortgages on the company's property is sufficiently incidental to these objects. It is difficult to imagine how a company whose objects include the ownership and development of real estate could reasonably function without the incidental ability to finance its operations by mortgaging its property. Furthermore, as Lieberman J.A. noted, "there is no evidence that the mortgage loan was not applied to accomplish a corporate object" (p. 167). Thus In re Introductions Ltd., supra, can be distinguished from this case. In re Introductions Ltd. involved a loan which violated an express object of the company. In this case, the loan does not violate an express object of Town House or Wellington. By mortgaging their properties, Town House and Wellington were exercising their powers under s. 20(1)(h) in furtherance of corporate objects.
Similarly, I cannot conclude that the memoranda of association of Town House and Wellington exclude the power granted to them by s. 20(1)(h). Companies have all the powers set out in s. 20, "except those of them expressly excluded by the memorandum". It is important to note that the powers in s. 20 must be excluded expressly. Excluding the power in s. 20(1)(h) would require far more express language than the phrase "[t]he objects for which the Company is established are subject to the provisions of the National Housing Act, 1954, and amendments thereto".
In addition, the argument that this proviso excludes the power to mortgage depends to a large extent upon the argument I have already rejected, namely that s. 16 of the National Housing Act, 1954 prohibits or makes illegal the granting of second mortgages. The Act does not provide that a company cannot be incorporated with other objects or powers. It requires CMHC to make loans to companies whose objects satisfy the definition of a limited‑dividend housing company. One of its objects must be to construct and operate such a company and there must be a restriction on the dividends. Again, in my view, the remedy for breach (for example, paying out excessive dividends) is the contractual one. Section 16(3)(k) makes it clear that CMHC was to satisfy itself, and there is no suggestion of interfering with provincial corporate law:
- . . .
(3) A loan may be made under this section only to a limited‑dividend housing company that has entered into a contract with the Corporation on the terms set out in subsection (4), to construct a low‑rental housing project or to convert existing buildings into a low‑rental housing project if
(k) the powers given to the company and activities or transactions that are permitted by its charter or other instrument of incorporation are satisfactory to the Corporation.
The conclusion that the second mortgages are not ultra vires is strengthened by considering the purpose of the ultra vires doctrine. Gower, Gower's Principles of Modern Company Law (4th ed. 1979), at p. 161, describes the ultra vires doctrine as follows:
Its purpose was two‑fold. First to protect investors in the company so that they might know the objects for which their money was to be employed: and secondly to protect creditors of the company by ensuring that its funds, to which alone they could look for payment in the case of a limited company, were not dissipated in unauthorized activities.
The application of the ultra vires doctrine to invalidate the second mortgages would not further this purpose. CMHC is a creditor of Town House and Wellington and thus is entitled to use the ultra vires doctrine to protect its loan from unauthorized use. However, CMHC's complaint is not that its loan is endangered but rather that it simply does not want Town House and Wellington to make the second mortgages. Thus CMHC is not seeking to use the ultra vires doctrine for the purpose of protecting its position as a creditor, but rather is seeking to use it to maintain control over Town House and Wellington. This is an improper use of the ultra vires doctrine. The ultra vires doctrine is not designed to give creditors the power to control their debtors, even where such control is to be exercised for a beneficial public purpose.
As a result, I conclude that neither the 1988 sale agreements nor the second mortgages were ultra vires the corporate powers of Town House and Wellington.
4. Prepayment of Mortgages
The appellant seeks deletion of the declaration contained in para. 6 of the chamber judge's formal judgment relating to each of Town House and Wellington and confirmed by the Court of Appeal. The declaration entitles 1988 purchasers to pay off the first mortgages and redeem. The Court of Appeal found that the provisions of the agreements which prohibited sale or other disposition were unenforceable because they were not restrictive covenants running with the land. The Court of Appeal also appears to have concluded that therefore they could not be conditions in restraint of alienation in that they created in personam rights only and not rights in rem. The Court of Appeal declined to decide whether the provisions were a clog on the equity of redemption because in view of the finding that these provisions were not restrictive covenants, the issue was academic. The respondents seek to have the provisions declared void presumably to ensure that the right to redeem is not affected.
In my opinion, having characterized these provisions as in personam rights, the Court of Appeal could not affirm the declaration entitling the 1988 purchasers to redeem unless it also concluded that breach of these covenants did not create a default under the mortgages that disentitled these respondents to prepay the amount owing. Whether or not a breach of these covenants had this effect depends largely on the interpretation of any pre‑payment provision contained in the mortgage. This is a matter not addressed by the Court of Appeal. I propose to first consider whether the Court of Appeal was right in concluding that the impugned provisions created in personam rights and then whether enforcement of in personam rights precludes prepayment and consequent redemption of the mortgages. Finally I will consider whether, if redemption is precluded by reason of the enforcement of the in personam rights, this constitutes a clog on the equity of redemption.
To the extent that the policy against restraints on alienation applies to contractual provisions that are not annexed to the land so as to run with the land, it 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. I agree with the Court of Appeal that the Crown is not immune from the rule against restraints on alienation and therefore is in the same position as other parties in this regard. Accordingly, it has been held that breach of such an agreement can constitute an event of default under a mortgage which entitles the mortgagee to accelerate payment at his option. In Canada Permanent Trust Co. v. King's Bridge Apartments Ltd. (1984), 1984 CanLII 3082 (NL CA), 8 D.L.R. (4th) 152, the Newfoundland Court of Appeal held that a covenant not to alienate could not restrict the mortgagor's right to sell or otherwise dispose of the property but "none the less a proviso permitting an acceleration of the repayment of the principal sum and other moneys payable under the indenture of mortgage is valid and is enforceable at the option of the mortgagee" (p. 155). Similarly, in Re Valley Vu, supra, a mortgagor who sold contrary to such a covenant was denied an order permitting prepayment of the mortgage and a discharge. In Paul v. Paul (1921), 1921 CanLII 514 (ON CA), 50 O.L.R. 211, the Ontario Court of Appeal held that a provision in a conveyance of land which prohibited sale or mortgage without consent did not render a sale without consent void but that an action for damages lay for breach of the covenant. See also Re Bahnsen and Hazelwood (1960), 1960 CanLII 407 (ON CA), 23 D.L.R. (2d) 76 (Ont. C.A.). In my opinion, the principle applied in these cases strikes the proper balance between two conflicting policies. On the one hand there is a policy against restraints on alienation which permits real property to circulate freely in commerce and preserves the right of the owner to dispose of it and on the other the law favours that bargains be kept and not breached with impunity. Accordingly, notwithstanding that the impugned provisions are not enforceable to prevent the transfer of a good title to the purchasers, non‑compliance with their terms constitutes a breach of the agreement for the purpose of triggering other remedies which the mortgagee has under the mortgage. Clause 12 of the operating agreements, which is headed "Default" and which is incorporated into the mortgages, provides for the acceleration of the loan and increase of interest payments "in the event of the Borrower . . . otherwise committing a breach of this agreement . . .". This is a remedy that is available to the appellant by reason of the breach occasioned by the dispositions made in 1988 and 1989. I will now consider whether this constitutes an act of default for the purpose of the prepayment provisions.
At the outset, I note that the Wellington mortgage does not provide for any right of prepayment. The mortgage by its terms can only be repaid by payments that span the loan period of 40 years. The respondents submit, however, that the court has a discretion to allow prepayment in the absence of a prepayment clause, citing Garnet Lane Developments Ltd. v. Webster (1986), 43 R.P.R. 138 (Ont. Div. Ct.). This case does not decide that the court has a discretion to allow prepayment absent a prepayment clause in the mortgage. In any event, if the court has such a discretion I would not exercise it in favour of this respondent in the circumstances of this case.
The Town House prepayment clause applies only when the mortgagor is not in default. In selling the properties the mortgagor has committed an act of default under clause 12 of the agreement which is also part of the mortgage. The mortgagor is, therefore, in default under the mortgage. Does that preclude the 1988 purchasers from availing themselves of the provisions of this mortgage? In order to prepay, these purchasers, while not bound by the agreements, must comply with the preconditions for prepayment. One of the preconditions is that the mortgage is not in default. Notwithstanding that the default is not that of the purchasers, this precondition disentitles anyone who seeks to repay the mortgage while the default continues. I would, therefore, set aside the declaration relating to prepayment unless the argument succeeds that in the circumstances the agreement constitutes a clog on the equity of redemption.
The foundation for the argument that the operation of the agreements constitutes a clog on the equity of redemption is that notwithstanding the payment of the mortgage debt the equity cannot be redeemed by reason of an impediment imposed by the terms of the mortgage instrument. The contractual postponement of the right to redeem by virtue of the fact that the mortgagor is 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. In Knightsbridge Estates Trust, Ltd. v. Byrne, [1938] 4 All E.R. 618, the English Court of Appeal held that the postponement of redemption for 40 years by reason of contractual provisions in the mortgage which provided for the principal to be repayable by instalments over that period with no right of prepayment or redemption before that time did not constitute a clog on the equity of redemption. Since I have found that there is no right of prepayment here by virtue of the terms of the mortgage, the mortgage is repayable at the end of the loan period of 40 years. This postponement of the right to redeem does not, however, create a clog on the equity of redemption.
5. Costs
While CMHC has been unsuccessful except with respect to the right of prepayment, the other parties are able to defeat an operating agreement of which they had notice. In those circumstances there will be no order as to costs in this Court.
We were asked to vary the order below on costs.
The guarantors argue that, having decided against CMHC on the merits, the Court of Appeal could not interfere with the chambers judge's order because of the provisions of Rule 505(3) of the Alberta Rules of Court, which require leave to appeal a costs order. There are two plausible interpretations of this rule. It could be interpreted to mean that leave is required if the appellant intends to contest the order as to costs as a separate issue regardless of whether the judgment appealed from is set aside on other grounds. Or it can be interpreted to mean that leave is only required when only the order as to costs is appealed. There does not appear to be a settled practice in this regard in Alberta. See Stevenson and Côté, Civil Procedure Guide (1989), at pp. 986‑90. Apparently, the Court of Appeal accepted the latter interpretation. In my opinion, it is the preferable interpretation and the costs were properly before the Court of Appeal when the orders as a whole were appealed.
In my opinion, the Court of Appeal made no reversible error in the disposition it made which resulted in the mortgagors bearing the brunt of the costs. The mortgagors and their purchasers seek to turn the property to commercial account freed of the restrictions of the operating agreement. The guarantors cannot be in a better position. The new owners also knew the state of the title and may properly be visited with costs subject to any contractual right over they may have against their vendors, the original mortgagors. Accordingly, I would not disturb the Court of Appeal's order as to costs.
Disposition
The appeal is allowed in part. The orders made by Veit J. dated December 13, 1989 are varied by deleting from each para. 6 thereof. In other respects the appeal is dismissed. The constitutional question does not arise. There will be no order as to costs in this Court.
Appeal allowed in part.
Solicitors for the appellant: Reynolds, Mirth, Richards & Farmer, Edmonton.
Solicitors for the respondent Hongkong Bank of Canada: Parlee McLaws, Edmonton.
Solicitors for the respondents 375069 Alberta Ltd., 386360 Alberta Ltd. and 376491 Alberta Ltd.: Bryan & Company, Edmonton.
Solicitors for the respondents Town House Development Ltd., Wellington Housing Developments Ltd. and Wheeler Holdings Ltd.: Cook, Duke, Cox, Edmonton.
Solicitors for the respondents Kate Wheeler, Pamela K. Wheeler, George L. Wheeler, Lois Anderson and Patricia May Kirk: Weir Bowen, Edmonton.
Solicitor for the intervener the Attorney General of Quebec: The Attorney General of Quebec, Ste‑Foy.
*Stevenson J. took no part in the judgment.
