An Agreement To Lease Can Be Enforced In Equity And Possession Ordered

The new and very complex decision in Midas Realty Corporation of Canada Inc. v. Galvic Investments Limited, 2008 CanLII 25063 (ON S.C.) decided a narrow but important issue of land leasing law – can an agreement to lease be enforced in equity to require possession of land? The short answer is yes.

Some of the analysis follows:

[21] The third ground on which Galvic relies is set out more fully in paragraph 41 of its counsel's factum as follows:

41. Midas Realty's right under the OLA is purely contractual. Its right is known as an interesse termini. An interest in the term. It is settled law that the holder of an interesse termini has no claim against the property, and cannot bring an application for possession or specific performance. Upon breach by the landlord, the holder of an interesse termini has only a claim for damages against the landlord, which is quite limited and narrow.

[22] I believe that, as a statement of the governing law, the above paragraph is open to serious objections. Most fundamentally, it misstates the law governing the concept of an interesse termini and ignores and confuses the distinction between legal and equitable rights.

[23] Although, in the initial response to the purported exercise of the option by Midas Realty, counsel for Galvic had relied on the requirement of a deed for the creation of a lease in section 1 (2) of the Statute of Frauds, at the hearing they did not dispute that the rights conferred by the OLA were entirely contractual. However, it does not follow from the fact that the option of Midas Realty was conferred by contract that, once it was exercised, there would be an agreement for a lease and not a lease. The choice between these alternatives depends on the intention of the parties as revealed by the documentary or other evidence. It has been addressed in a number of cases in this jurisdiction of which McLean v. Young, [1850] O. J. No. 191 (U.C.C.P.) was one of the earliest. Subsequent cases include Pain v. Dixon (1923), 52 O.L.R. 347 (H.C.) and Tann v. Seiberling Rubber Co of Canada Ltd, [1965] 1 O.R. 157 (H.C.).

[24] As Megarry and Wade in the Law of Real Property (3rd edition, 1966), at page 630 stated:

A lease is clearly distinct from a contract to grant a lease: the difference is between "I hereby grant a lease" and "I hereby agree that I will grant a lease".

[25] Neither the fact that the lease is to commence at a future date - a reversionary lease - nor that it is conditional on the performance of a condition - such as the exercise of an option by the lessee - is inconsistent with the immediate creation of a future leasehold interest in the land. In the latter case, the precondition attached to the interest does not prevent it from being an existing future leasehold interest in the land to which, for example, the rule against perpetuities would apply. Thus, in Harris v. Minister of National Revenue, [1966] S.C.R. 489, it was held that an option to purchase the reversion on a lease for 200 years at the expiration of the term was void as perpetuitous. In delivering the judgment of the court, Cartwright J. stated that it was settled that:

An option to purchase land gives rise to a contingent equitable interest in the land, the contingency being the election to exercise the option and payment of the price...

[26] Similarly, the fact that an option to acquire a lease is conferred under a contract and is enforceable contractually does not entail that there is only a contract to grant a lease in the event that the option is exercised, and not a contingent leasehold interest in the land that arises when the option is granted. The exercise of the option causes the pre-existing contingent interest to vest. Where this is the evident intention of the parties, the provision for the execution of a lease by the lessor was traditionally treated as a covenant for a further assurance: McLean, at para 16.

[27] I am of the opinion that, in this case, - as in Pain and Tann - the intention of the parties was that, on the exercise of the option, there would be a lease and not merely an agreement to create a lease. A contingent interest in a lease was created on February 4, 2002 when the option was created and the interest vested "automatically" when the option was exercised. On that interpretation the lease - not being granted under seal – did, indeed, offend section 1 (2) of the Statute of Frauds which provides that "all leases and terms of years of any ... lands are void unless made by deed." As under the provisions of exhibit B, the lease was to be for a minimum term of 10 years commencing upon the exercise of the option, the exception in section 3 of the statute does not apply.

[28] In a line of cases commencing with Parker v. Taswell (1858), 2 DeG. & J. 559 (L.C.) it has been consistently held that a lease which is void at law can be treated in a court of equity as an agreement to grant a lease and specifically enforced on that basis. In Parker, the provisions of the Real Property Act 1845 (U.K.) had provided that a lease exceeding three years made otherwise than by a deed was void “at law”. The Lord Chancellor stated:

The legislature appears to have been very cautious and guarded in language, for it uses the expression "shall be void at law". If the legislature had intended to deprive such a document of all efficacy, it would have said that the instrument should "be void to all intents and purposes". There are no such words in the Act. I think it would be too strong to say that because it is void at law as a lease, it cannot be used as an agreement enforceable in Equity, the intention of the parties having been that there should be a lease, and the aid of Equity being only invoked to carry that intention in to effect.

[29] Parker was followed in Pain, and in Tann, and in each of these cases it was recognised that the implied agreement could be enforced by an order for specific performance. At the relevant time in each of those cases, section 1 (2) of the Statute of Frauds contained essentially the same language as the English statute. The words, "at law", however, no longer appear in section 1 (2). With the assistance of counsel and the research facilities of the Great Library, I am satisfied that the deletion of the words was effected by the commissioners appointed in 1959 to consolidate and revise the public general statutes of Ontario. The words were possibly regarded by them as anachronistic, or surplusage, after the fusion of courts of common law and equity at the end of the 19th century. Whether or not that is correct, I believe it is clear that the commissioners had no power to change the pre-existing law. By section 3 of the Statutes Revision Act, 1959, S.O. 1959, c. 94, the commissioners were authorised only to

make such amendments as are necessary to bring out more clearly what is deemed to be the intention of the legislature or to reconcile seemingly inconsistent enactments or to correct clerical, grammatical or typographical errors.

[30] In consequence, I am of the opinion that the reasoning of the Lord Chancellor in Parker - as subsequently accepted and applied in this jurisdiction - continues to be authoritative.

[31] In the ultimate analysis then the position is the same as that accepted by counsel at the hearing - namely, the OLA is to be understood to have created an agreement to grant a lease. It follows, also, that the submission of Galvic's counsel on the rights of a person with an interesse termini are beside the point. They are rights that exist at common law after a lease has been granted and before the lessee has entered into possession. The concept has been abolished for residential tenancies in this jurisdiction and, for all purposes, in England in 1925. Its nature and the rights attaching to it were conveniently summarized by Megarry and Wade, at page 638:

Before 1926 there was a common law rule that a lessee acquired no actual estate in the land until he had taken possession in accordance with the lease. Until he had exercised his right to take possession he had a legal proprietary right in the land which carried with it a right of entry and was called an interesse termini, an interest of a term. This was no mere equitable interest, nor a mere licence or right of action, but was an interest in land which could be freely assigned, and enabled the lessee to sue any person interfering with his entry on the land.

[32] I note, in particular, that the rights attaching to an interesse termini were rights recognized in courts of common law before the Judicature Act. These included a right to enter into possession. The utility of such a right to a lessee facing a recalcitrant lessor was constrained by the provisions of the criminal law that prohibited forcible entry. The rights were common law proprietary rights, and not merely personal contractual rights against a lessor. As Megarry and Wade observed, they constituted an interest in land although not a legal estate. Thus, prior to the Judicature Act, the tenant had the right to obtain possession by an action of ejectment against a third party; Cleveland v. Boice, [1862] O.J. No. 89 (U.C.Q.B.) is an example. In Gillard v. Cheshire Lines Committee (1884), 32 W.R. 943 (C.A.), the rights of the tenant were described as rights in rem.

[33] Despite the ability of a tenant with an interesse termini to maintain ejectment against a third party, there was an unresolved question at common law whether the action was available to such a tenant against a landlord in possession as the tenant had no estate on which to base the action. The question was discussed by Professor Bora Laskin in an extract from Cases and Materials in Land Law (Revised edition 1964, pages 189ff) that was included as Appendix F to the Interim Report of the Law Reform Commission of Ontario on Landlord and Tenant Law Applicable to Residential Tenancies (Department of the Attorney General, 1968). After referring to the inconclusive case law on the question, the learned author stated:

It seems wrong today that even in the absence of legislation sweeping away interesse termini (as was done in England by the Law of Property Act, 1925...) there should be a refusal to enforce a claim to possession against a lessor where no outstanding rights of third persons would be affected.

[34] If it were necessary to consider the unresolved question, I would incline to the view that, under the present law, an order for the delivery of possession – enforceable by a writ of possession pursuant to rule 60.03 - could be obtained against a lessor by a lessee with an interesse termini: Cleveland, at para 12; Saunders v. Roe, [1867] O.J. No. 104 (U.C.C.P.). Whether or not that is a correct statement of the modern law, it would appear to me to be quite wrong to allow the doubt that existed at common law before the Judicature Act to affect the availability of equitable remedies when law and equity are now administered in the same court. At the very least, a person with a right to enter peaceably and take possession should now be entitled to an injunction restraining the lessor from interfering with that right.

[35] Similarly, I find it difficult to understand why, at this stage of the law’s evolution, an agreement for a lease - whether express or implied under the principle in Parker v. Taswell – which caries with it an implied agreement to let the tenant into possession cannot be enforced by an order for specific performance.

[36] Counsel for Galvic cited a passage in the Ontario Real Estate Law Guide (CCH Canadian Ltd, looseleaf), section 53655 which reads:

A tenant under a lease or agreement for lease who has not gone into possession is not entitled to sue for specific performance of the lease. He is not entitled to possession and no estate vests in him. His only remedy is in damages.

[37] Neither the authors of the work, nor counsel, cited authority for that proposition and, if it is intended to deny that possession may be obtained through an order for specific performance of an agreement for a lease, it appears to me to be wrong in principle. The fact that a tenant with an interesse termini has no estate should have no bearing on that question where the agreement contains – expressly or impliedly – an agreement to deliver possession as is clearly the case on the present facts: see Reaume v. Lalonde, [1939] O.W.N. 167 (C.A.), at page 168.

[38] In Parker, the tenant had entered into possession but nothing in the reasoning of the Lord Chancellor suggests that was a relevant - let alone a crucial - factor. Similar cases in which Parker was followed include Zimbler v. Abrahams,[1903] 1 K.B. 577 (C.A.); Martin v. Smith (1874), L.R. 9 Ex. 50 (Ex.); and Benecke v. Chadwicke (1865), 4 W.R. 687.

[39] In Benecke, for example, negotiations for a mining lease had concluded, and draft documents were being exchanged, when the intended lessor died. His executors were uncertain whether they could properly execute the lease and ought the protection of a court order. It was held that there was an agreement for a lease and specific performance was granted to the intended lessee. The court emphasised that this was an equitable result in view of the preparatory work done by the lessee on adjoining land and did not refer to the fact that, after the death of the lessor, the lessee had entered into possession.

[40] I have found no cases in which the remedy of specific performance was granted to - or withheld from - an intended tenant under an agreement for a lease who had not entered into possession. Nor have I found any cases in which the fact that an intended tenant had entered into possession was treated, explicitly or impliedly, as having any bearing on the availability of specific performance.

[41] Although, on the facts of each of Pain and Tann, the remedy was withheld, it was clearly accepted that, if the conditions for its availability were otherwise satisfied, it might be granted against an intended tenant who had not entered into possession.

[42] The reasoning behind the suggestion that an order for possession cannot be obtained by specific performance of an agreement for a lease may be that enforcement of the agreement according to its terms would merely give the tenant a lease and an interesse termini. Thus, in the extract from his work cited by the Law Reform Commission - after referring to the doubt that attached at common law to the availability of ejectment against a lessor when a tenant under a lease had not entered into possession - Professor Laskin commented:

Specific performance is inapplicable save to an agreement for a lease, but in such a case the relief would be execution of a lease and hence the position is not advanced.

[43] This traditional approach which distinguishes rigidly between a lease as a conveyance and an agreement for a lease was subsequently repudiated by Laskin J. in Highway Properties Ltd v. Kelly, Douglas and Co. [1971] S.C.R. 562 where the learned judge stated:

It is no longer sensible to pretend that a commercial lease, such as the one before this court, is simply a conveyance and not also a contract. It is equally untenable to persist in denying resort to the full armoury of remedies ordinarily available to redress repudiation of covenants, merely because the covenants may be associated with an estate in land.

[44] Although the absence of an estate may prevent covenants in a lease from being enforceable by a tenant with an interesse termini, an agreement for a lease ordinarily implies an agreement - a contractual obligation - to deliver possession at the commencement date. A breach of the implied agreement can give rise to an action for damages as in Reaume, above, and I see no reason why the principles that govern the availability of the equitable remedies of specific performance and injunctions to enforce other contractual obligations should not also be applicable. Section 96 (2) of the Courts of Justice Act provides that in cases of conflict between rules of common law and equity, the latter are to prevail. Even if one were to ignore the notorious fictions accepted for the purposes of the common law action for ejectment prior to the Judicature Acts, it cannot be correct that supposed, or actual, restrictions on its scope also preclude an application of equitable remedies that would entitle the intended lessee to an order for delivery of possession - an order that would be enforceable by a writ issued pursuant to rule 60.03.