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Rule against perpetuities remains alive

I am convinced there is an entire generation of real estate lawyers that simply do not know what the rule against perpetuities actually is. I would also bet that, among those practitioners that sort of remember what the rule actually is, very few of them can accurately articulate the rule or describe the scenarios where the rule can have real-world consequences for real estate transactions. Indeed, it is unlikely that there are more than a few practitioners that can comfortably discuss the rule. In the meantime, the rest of us are left desperately clinging to the comfort afforded us in Lucas v. Hamm, 56 Cal. 2d 583, 364 P. 2d 685. That’s the California case that excused a lawyer from professional negligence over a mistake because, according to the court, the rule was just too complicated for the average lawyer to possibly ever comprehend.

Unfortunately, it is unlikely that Lucas v. Hamm would be a defence against professional negligence in Canada. Take the recent Ontario Court of Appeal decision in 2123201 Ontario Inc. v. Israel Estate, 2016 ONCA 409, 70 R.P.R. (5th) 169. The case reminds us that the rule is alive and well, at least in Ontario, and can have significant consequences for real estate conveyances unaware of its impact.

The facts in Israel Estate are relatively simple. In 1931, an owner sold a gravel quarry to operators who immediately granted an option back to the owner allowing the owner to reacquire the property, at a nominal price, once the gravel in the quarry was exhausted by the operators. The option was registered on title and that registration was constantly renewed in accordance with the statute. Nearly 85 years later, the gravel operators’ successors reneged on their obligations under the option. Instead, they argued that once the gravel had been depleted, the original owner had no right to reacquire the property pursuant to the option, because the rights under that option are void by operation of the rule. The Court of Appeal agreed with the operators — the rule was very much alive and well in Ontario and practitioners were to ignore it at their own peril.

Briefly put, the rule states that no matter what the intent of the conveyancing document, no legal interest in property is valid unless it vests within the lifetime of a life-in-being, plus 21 years. Applied to Israel Estate, the rule would automatically render the option void unless it could be shown that the gravel was in fact depleted before 2001 (a date that was 21 years after the owner’s death).

The Court of Appeal concluded that the rule applied in Israel Estate. Accordingly, the original owner’s re-acquisition rights were contingent upon the gravel being depleted by 2001. This did not happen, so his rights did not vest within the perpetuities cut-off period, and the option was, therefore, rendered void by operation of the rule.

The continued applicability of the rule as part of Ontario law was undisputed, and the case turned on the nature of the option agreement itself. That’s because the agreement was an unusual instrument, and the Court of Appeal had to first determine whether it purported to create an interest in land. If the option agreement did create an interest in land, then that interest in land was subject to the rule.

If the option agreement did not create an interest in land (and was more of a personal right such as a right of first refusal), then it might have survived the ravages of the rule. Ironically, the Court of Appeal determined that the true intention of both parties was in fact to create an interest in land, yet that very determination sealed the option agreement’s fate as an interest in land because it then attracted the operation of the rule. That is, by concluding that the option was intended by all parties to be an interest in land, the Court of Appeal guaranteed that the intention of all parties would then be frustrated by the operation of the rule.

In Ontario, the operation of the rule is governed by the Perpetuities Act, R.S.O. 1990, c. P .9.
However, all this statute really does is modify the common law to fit the more progressive “wait-and-see” rule. At pure common law, the option agreement in Israel Estate would have been void ab initio, simply because there was a possibility that the gravel would not be depleted by 2001. Under a wait-and-see modification of the rule, the option agreement was contingently valid until 2001 (21 years after the owner’s life). However, it became void immediately after the vesting trigger (i.e., the depletion of gravel on the property) had not occurred. 

Most common law jurisdictions in Canada (indeed most of the common law world) adopt the wait-and-see variation of the rule. However, New Brunswick still uses the classic void ab initio common law rule, while Manitoba and Nova Scotia have abolished the rule altogether.

Israel Estate reminds all practitioners that real estate law is more than just filling out forms and processing closings, and it can have devastating effects. There is very real substantive law behind every real estate transaction. Some of it is quite archaic in its nature and in its purpose, but, nonetheless, it is still valid law.

Jeffrey Lem is the director of titles for the province of Ontario. This article reflects the personal views of the author alone.

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