COURT FILE NO.: CV-14-517239

DATE: 20190913

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Mahnaz Reyhani and Hamidreza Keywandariyan, Plaintiffs/Respondents

– AND –

Asif Karimov and Sahar Zomorodi, Defendants/Appellant

BEFORE: Justice E.M. Morgan

COUNSEL: Michael McKee, for the Plaintiffs/Respondents Sharon Sam, for the Defendant/Appellant, Asif Karimov

HEARD: September 12, 2019

APPEAL OF PLEADINGS MOTION

[1] This appeal of a pleadings motion requires the court to delve, ever so briefly, into the Rule Against Perpetuities.

I. The underlying motion

[2] The Defendant/Appellant, Asif Karimov (“Appellant”), appeals the Order of Master Sugunasiri dated May 27, 2019, granting leave to the Plaintiffs/Respondents (“Respondents”) to further amend their Amended Statement of Claim.

[3] The Appellant submits that the Respondents’ new pleading is not legally tenable as it contains a cause of action premised on a misinterpretation of the Perpetuities Act, RSO 1990, c. P.9 (the “Act”). It is the Appellant’s position that on a pleadings motion the court must determine whether a proposed amendment contains a tenable cause of action, and that a failure to do so amounts to an error of law. Appellant’s counsel submits that an error of law is reviewable on a correctness standard: Din v Melady, 2009 CarswellOnt 8322, para 2.

[4] Respondents’ counsel takes no issue with the standard of review. However, he submits that the Master was correct in leaving the merits of the newly proposed cause of action to be resolved at a later date on a full evidentiary record.

[5] In his Notice of Appeal and factum, the Appellant also submitted that the Respondents’ new claim in their further amended pleading is out of time and is therefore limitation barred. At the outset of the hearing, however, Appellant’s counsel advised the court that she is not pursing the limitation ground of appeal.

II. The pleading amendment

[6] This action concerns a dispute over ownership of a residential property with the municipal address 120 Pugsley Avenue, Richmond Hill, Ontario (the “Property”). The Respondents are the registered owners of the Property, which was purchased in 2013. The Appellant financed the purchase. The parties documented their relationship by means of a Trust Agreement which declared that the Appellant is the 100% beneficial owner of the Property and that the Respondents hold legal title as trustees for the Appellant (the “Trust Agreement”).

[7] The Respondents’ Statement of Claim was first issued in 2014 and was amended shortly thereafter. In it, they alleged that legal title to the Property was to be transferred to the Appellant within 6 months of the date of the Trust Agreement. Under this description, the Appellant would have a vested beneficial interest as well as a vested legal interest in the Property.

[8] In July 2015, the Appellant defended the claim and counterclaimed against the Respondents. The Appellant pleaded that under the Trust Agreement the legal title was not automatically to be transferred to him, but rather that he was entitled to be transferred the legal title within 6 months of his serving a demand for transfer of title on the Respondents. The Appellant’s position is that this could occur at any time, since the Trust Agreement did not specify any particular time frame within which the Appellant must make the demand for legal title. His counterclaim also contained what was, in effect, a demand that legal title to the Property be transferred to him.

[9] In February 2019, the Respondents moved to amend their claim once again, this time in effect agreeing with the Appellant that under the Trust Agreement the title was only to be transferred to him within 6 months of his demanding the transfer. Although the Master allowed the amendment, she took note of the substantive change in the Respondents’ position from one pleading to another. Her Costs Endorsement of September 6, 2019 characterized the Respondents as having presented the Appellant with “an internally inconsistent statement of claim that has been somewhat of a moving target.”

[10] The Respondents’ new pleading makes the claim that the Trust Agreement is void due to its failure to specify a time frame for legal title to vest. It alleges that this amounts to a contingent interest in the Property which, since it did not specify a time in which the contingent interest would vest, violates the common law Rule Against Perpetuities.

[11] The change from the Respondents’ initial pleading – i.e. the change from saying that legal title would be transferred to the Appellant within 6 months of the Trust Agreement to saying that legal title would be transferred to the Appellant within 6 months of his demanding the transfer – was, in effect, necessary to support the Respondents’ new legal position that the Trust Agreement is void for perpetuities. This pleading characterizes the Appellant’s interest as potentially vesting in the too distant future, and reflects the fact that the often-stated policy rationale for the Rule Against Perpetuities is to prevent the indefinite sterilization of property by fostering certainty of vesting: Politzer v Metropolitan Homes Ltd., 1975 CanLII 208 (SCC), [1976] 1 SCR 363, para 7.

III. The perpetuities issue

[12] At common law, an interest in property must vest “not later than twenty-one years after some life in being at the creation of the interest”: 2123201 Ontario Inc. v The Estate of Harold Israel, 2016 ONCA 409, para 20, quoting Sutherland Estate v Dyer (1991) 1991 CanLII 7120 (ON SC), 4 OR (3d) 168, 171 (Gen Div). Where no life in being is referenced, the perpetuity period is 21 years: Silver v Fulton, 2011 NSSC 127, para 50.

[13] As Appellant’s counsel points out, an interest in property is either vested or contingent; there is no middle ground. A contingent interest is one that is delayed by the occurrence of some future event – e.g. where an agreement specifies that title will be delivered on a future demand or the exercise of a future right: Israel, para 38.

[14] Under the Trust Agreement, the beneficial interest was confirmed to already belong to the Appellant. Accordingly, the beneficial ownership is a vested interest. In terms of the legal interest in the property, Appellant’s counsel analogizes the Appellant’s right to demand the transfer of title to an option to purchase. As Laskin JA described it in Israel, para 19: “An option to purchase gives the option holder the right but not the obligation to purchase land… Because an option to purchase creates an interest in land, it is specifically enforceable at the time the option is granted. But to remain valid the option must be exercised within the perpetuity period.”

[15] Here, the Trust Agreement creates a specifically enforceable right vis-à-vis legal title, which creates an immediate equitable interest. Title must be transferred within 6 months of a demand, but there is no identifiable time frame specified for the demand itself. Therefore, the right is contingent on the Appellant exercising his right to demand.

[16] Where a specifically enforceable interest is created at the outset, but the vesting of that interest is contingent on an act that is uncertain to happen, the interest is a contingent one to which the Rule Against Perpetuities applies: Politzer, para 7. In this case, the Appellant’s contingent interest in legal title to the Property could vest at any time since there is no outside limit to when he can exercise his right to demand the transfer of title. Under the common law Rule Against Perpetuities, this right “which may be exercised beyond the perpetuity period is void to the extent that it creates an interest in land”: Politzer, para 6, quoting Irving Industries Ltd v Sadim Oil & Gas Co., 1974 CanLII 190 (SCC), [1974] 50 DLR (3d) 265.

[17] The Perpetuities Act was enacted in 1990 and has changed the common law for Ontario. At common law, if an agreement did not specify a time frame within 21 years for an interest to vest, it was void. Under the Act, the agreement is presumptively valid and one can “wait and see” whether the contingent interest vests within 21 years. More specifically, section 3 of the Act says that no interest is invalid as violating the Rule Against Perpetuities by reason “only of the fact that there is a possibility of such interest vesting beyond the perpetuity period.” Section 4 then follows up on this change, and states that such an interest is valid until events show that it is “incapable of vesting beyond the perpetuity period”.

[18] If active steps are being taken to vest the contingent interest during the 21-year period, the interest is capable of vesting – or, to use the double negative compelled by the wording of section 4 of the Act – not incapable of vesting beyond the perpetuity period. In that case, the interest is “presumptively valid, in accordance with the Perpetuities Act”: 2284064 Ontario Inc v Shunock, 2017 ONSC 7146, para 90 (SCJ).

[19] A pleadings amendment under Rule 26 must be legally tenable. As in a Rule 21 motion, the pleading will be struck if it is “plain and obvious” that it discloses no reasonable cause of action: Rayner v McManus, 2017 ONSC 3004, paras 15-17 (Div Ct). Here, the Trust Agreement was entered into in July 2013. Therefore, the perpetuity period extends until July 2034.

[20] Demand for transfer of legal title to the Appellant was made in the Appellant’s counterclaim of July 2015. As Appellant’s counsel points out, the courts have already identified interests analogous to that of the Appellant’s as being specifically enforceable, and so there is virtually no chance that the interest will not be transferred. Accordingly, the Appellant’s interest can be said to have already vested as of the date of his demand, or, alternatively, it will vest whenever the court issues its final order effecting the transfer (which will undoubtedly occur before 2034 – i.e. 21 years from the creation of the interest).

[21] Appellant’s counsel therefore states that actual events have established that the Appellant’s interest is incapable of vesting beyond the perpetuity period. Under s. 4(b) of the Act, it is therefore to be declared a valid interest. Since the Respondents cannot possibly establish that the Trust Agreement is void, the proposed amended pleading is untenable at law.

[22] Respondents’ counsel takes a different view of the Perpetuities Act. He submits, first of all, that the Appellant already has a vested beneficial interest in the Property. He then argues that the Appellant’s right to have the legal interest transferred is therefore not subject to the Act since he already has a vested beneficial interest and the Act only applies to contingent interests.

[23] Respondents’ counsel goes on to contend that since the Act does not apply to the Appellant’s interest in the Property, the common law applies instead. He submits that at common law, the Appellant’s right to demand a transfer of the legal title would violate the Rule Against Perpetuities as there is no specified time frame for its exercise and it could occur after 21 years has elapsed.

[24] I agree that the Act only amends the common law to the extent that it clearly and specifically does so: D’Mello v Law Society of Upper Canada, 2014 ONCA 912. Where there is no statutory reform of the Rule Against Perpetuities, the common law version of the Rule continues to apply: Silver v Fulton, para 59. Beyond that general proposition, however, I do not see the logic in the Respondents’ position.

[25] It is elementary in the law of trusts that a trust creates there is a division between the legal interests and equitable or beneficial interests. Either type of interest may be contingent – i.e. dependent on a future event which may or may not occur – and so either may run afoul of the 21-year rule. In the Appellant’s case, the beneficial interest is vested and the legal interest is contingent. While the Appellant’s beneficial interest is not impacted upon by the Rule Against Perpetuities, his legal interest is. Respondents’ counsel has cited no authority, and I can think of no rationale, for saying that once a beneficial interest is established in a given piece of property the Act does not apply to the legal interest in the same property.

[26] To reiterate the Supreme Court of Canada’s characterization: “[T]he rule against perpetuities is concerned with the certainty of vesting”: Politzer, para 7. That concern applies whether it is an equitable interest or a legal interest that is at issue. Legal title that will vest upon exercise of an option – or, as here, a demand – is subject to the Rule Against Perpetuities: Israel, para 24. There is no reason that I can see that this should be altered because the legal title is accompanied by an equitable interest as well.

IV. The untenable pleading

[27] The Master stated at para 7 of her endorsement that, “Tenability is not a deep dive.” While she conceded that the Respondents have an “uphill battle”, she determined that the question of whether and how the Rule Against Perpetuities applies should be determined only after a full trial record is before the court.

[28] With respect, I do not know what evidence beyond that already in the record would be necessary to make the tenability determination. The Trust Agreement on its face sets out the rights of the parties, and it explicitly indicates that the Appellant’s entitlement to the legal interest in the Property is a contingent one. That means that the Rule Against Perpetuities, as amended by the Act, applies to the Appellant’s legal interest.

[29] Sections 3 and 4 of the Act are equally explicit in displacing the common law Rule Against Perpetuities and in saving a non-time limited contingent interest such as the Appellant’s legal interest under the Trust Agreement. Section 3 reforms the law in holding that such interests are not void ab initio, while section 4 reforms the law in adopting a “wait-and-see” position with respect to contingent interests that are not time limited. No further record is needed.

[30] The Respondents do not have an uphill battle in attempting to establish that the Appellant’s legal interest is void for perpetuities. They have an impossible one. Their position is simply untenable.

[31] In Steinberg v Ellis Entertainment Corp., 2012 ONCA 362, para 22, the Court of Appeal instructed that, “The court should review a proposed pleading to determine whether it is legally tenable and should refuse an amendment as legally untenable if it is clearly impossible of success.” In failing to engage in that analysis, the learned Master erred in law.

V. Disposition

[32] The Order of the Master dated May 27, 2019 is set aside.

[33] The Appellant is entitled to his costs of the appeal. Counsel for both parties have provided me with Costs Outlines that are reasonable and modest. Counsel for the Appellant seeks just over $5,000 on a partial indemnity basis, while counsel for the Respondents would seek just under $5,000. Neither side’s request would take the other by surprise: see Rule 57.01(1)(0.b) of the Rules of Civil Procedure.

[34] The Appellant also seeks a reversal of the Costs award issued on September 6, 2019. Given my conclusion on the merits of the appeal, the Appellant is entitled to costs of the proceeding below. As here, the Master noted in her Costs Endorsement that both sides had submitted similar and modest costs requests. She awarded the Respondents (Plaintiffs below) $3,400 in costs, which is hereby set aside.

[35] The Respondents shall pay the Appellant costs in the all-inclusive amount of $8,400, representing $5,000 for the appeal and $3,400 for the motion below.

Morgan J.

Date: September 13, 2019