For many lawyers, the rule against perpetuities brings back nightmares about trying to understand (or ignore at our peril) the tenet in law school. We then prayed that we never have to encounter this reminiscence of English feudal law ever again.

The rule against perpetuities applies to contingent interests in property that vest too remotely. More specifically, it applies to extinguish an interest in property if the interest does not vest within 21 years.

As recent cases have shown, the rule is still alive and kicking, and the courts are going to pay careful attention to the wording of interests to determine the true intent of the parties.

Loyalist (Township) v. Fairfield-Gutzeit Society

In 2019, the Superior Court, in Loyalist (Township) v. Fairfield-Gutzeit Society 2019 ONSC 2203, looked at whether certain terms arising from a transfer of properties between the Village of Bath in Lennox & Addington County and the Fairfield-Gutzeit Society contravened the rule against perpetuities.

In 1997, the Village of Bath was concerned that two of its historic buildings would not be adequately protected following an impending amalgamation with two other local authorities, so it transferred the ownership of the properties to the society. The transfer/deed contained a provision that, if the society wished to dispose of its interest in the properties to an organization that had different objects than the society, then the society would first have to offer the properties back to the township, where the township had an option to purchase them for $2. When the properties were converted to the land titles system, the covenant carried over on the parcel registry.

By 2015, the lease had ended and the society was trying to sell the properties as it could not find a new tenant. The township attempted to prevent the sale by relying on the option, while the society advanced, amongst other arguments, that the rule against perpetuities negated the option.

It has long been established (see 2123201 Ontario Inc. v. Israel Estate 2016 ONCA 409, at para. 24) that an option to purchase creates an immediate interest in land, thus is subject to the rule against perpetuities, while a right of first refusal does not create an interest, thus is not subject to the rule against perpetuities.

In reviewing the transaction, the court determined that the circumstances here did not create an immediate interest in land as the society was always able to transfer the properties to entities that had the same objects as the society. Moreover, the township was attempting to exercise its option within 21 years of the transaction. Thus, the rule against perpetuities would not apply.

Ottawa (City) v. ClubLink Corporation ULC

The recent Ontario Court of Appeal case, Ottawa (City) v. ClubLink Corporation ULC 2021 ONCA 847, having a similar fact pattern as Loyalist, further clarifies when the rule against perpetuities applies.

Here, the originating transaction involved an agreement with a predecessor of ClubLink Corporation ULC, holding land, subject to various historical land development agreements affecting its use that were registered on title by the former City of Kanata, now the City of Ottawa. The agreement, dated 1981, and subsequently added on to in future years, included provisions stating that the owner must use 40 per cent of the open space for recreation and natural environmental purposes, including operating a golf course on the property in perpetuity. If the owner wanted to discontinue using the golf course lands to operate a golf course, such lands were to be conveyed to the city at no cost.

After operating the golf course for over 24 years, ClubLink began exploring the possibility of developing the golf course lands for residential and open space purposes. ClubLink submitted planning applications for a zoning bylaw amendment and approval of a plan of subdivision and publicly accessible green space on the golf course lands. In response, the city brought an application for an order requiring ClubLink to withdraw its application and requested a declaration that ClubLink's obligations under the agreements remain valid and enforceable.

The application judge had previously found that the rule against perpetuities did not apply as the provisions at issue in the agreements merely established a contractual right to acquire property and the parties did not intend to create an interest in land.

The Court of Appeal stated, in para. 50, that "[c]ontractual provisions do not always fit neatly within the common dichotomy, which is found in many of the perpetuities cases, of an option to purchase that crates a contingent interest in land and a right of first refusal that does not." Thus, a basic contractual interpretation exercise is needed to determine the intention of the parties.

Since the city's interest in the golf course lands was contingent on the owner ceasing to operate the golf course and the reconveyance was contingent on the city ceasing to use the lands as prescribed, the Court of Appeal found that when the agreements are interpreted as a whole, the parties intended to create a contingent interest in the golf course lands that ran with and fettered the land. Therefore, the Court of Appeal reversed the lower court decision.

The Court of Appeal, referring to the Supreme Court's decision in Canadian Long Island Petroleums Ltd. et al. v. Irving Industries Ltd. [1975] 2 S.C.R. 715, emphasized that a policy consideration in applying the rule of perpetuities is to not fetter real property "with future interests dependent upon contingencies unduly remote which isolate the property and exclude it from commerce and development for long periods of time, thus working an indirect restraint upon alienation, which is regarded at common law as a public evil."

It is interesting to note that the basic structure of the transaction in ClubLink is not too different from that in Loyalist. In both scenarios, the properties can be transferred if the properties are not used in a prescribed manner. One differentiating factor is that, in Loyalist, the transfer was subject to a right of first refusal, albeit for only $2, while in ClubLink, the transfer was via an automatic conveyance. Although the Court of Appeal in ClubLink did not address this distinction, one wonders if the decision would have been different had the transaction been structured slightly differently in 1981.

Key takeaways

The rule against perpetuities is alive and well and courts will apply basic contract interpretation to determine the true intent of the parties at the time the agreement was made in order to determine whether the rule against perpetuities applies. Therefore, it is important to consider this rule in the structuring of any rights attached to real property.

Originally Published by The Lawyer's Daily

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