Assignments of Contracts, Novation and Privity
| Author | Craig R. Carter |
| Profession | Fasken Martineau DuMoulin LLP |
| Pages | 47-94 |
Assignments
of
Contracts,
Novation,
and
Privity
I.
INTRODUCTION
This paper will
not
deal with conveyances
of fee
simple real property
interests. Other transfers
or
conveyances
of
interests
in
land
or
person-
al
property normally associated with land
will,
however,
be
considered.
In
particular, special rules relating
to
assignments
of
mortgages, con-
tracts, leasehold interests,
and
easements will
be
considered.
The
ability
to
convey
or
transfer
real property assets
is a
funda-
mental characteristic
or
benefit
of the
bundle
of
rights that constitutes
ownership
of
property.
The
value
in the
asset
is
threefold. First,
the
income generating ability
of the
asset creates value
for the
holder
of the
land
or
asset. Second, the. ability
to
transfer
the
property
or
asset
to a
third party
who is
prepared
to pay a
premium
for the
income generat-
ing or
future
income generating potential
of the
property creates addi-
tional value equal
to the
premium. Third,
the
ability
to
convey
the
asset
to a
third party creates
liquidity.1
Of
Fasken
Martineau
DuMoulin
LLP.
1 The
ability
to
convey land
and the
contractual assets associated with
the
land
to
a
third party creates liquidity. This liquidity
is
what makes real property
mortgageable. Without this liquidity,
a
lender would have
to
rely solely
on the
income
from
the
property
and the
right
to
seize other income streams
of the
borrower.
The
ability
to
leverage real property
is an
important criteria
for
47
Craig
R.
Carter
48
Craig
R.
Carter
These benefits apply
as
well
to the
assignment
or
transfer
of
rights
arising
out of
contracts relating
to
land.
Surprisingly,
the law
treats
transfers
of
contractual rights
in a
different
and
more restrictive manner
than transfers
of fee
simple interests
in
land. This
difference,
as we
shall
see,
is
known
as
privity
of
contract. Equally surprisingly,
the
enforce-
ability
of
covenants associated with real property against third parties
is
also treated
differently
from
pure contractual covenants.
The
transferability
of
assets,
including contractual rights, unlocks
the
true value
of the
asset
or
right
and
should,
all
things being equal,
result
in the
property
or
right ending
up
with
the
person
for
whom
it
holds
the
greatest utility
or
value.
Any
unnecessary restriction
on the
transferability
of
contractual rights
is
counter-productive.
It is for
this
reason that
the law has
crafted
numerous exceptions
to the
doctrine
of
privity
of
contract.
In the
writer's
view,
the
time
has
come
to
abolish
the
doctrine
of
privity
of
contract
in
order that contractual benefits
be
freely
assignable
and
obligations
freely
assumable.
In
summary,
the
ability
to
convey real property assets
and
contrac-
tual rights
is
fundamental
to the
generation
of
wealth.
For
historical rea-
sons
the
assignment
of
contractual assets
and
benefits
is
more restricted
than
the
transferability
of
real property assets. Having boxed themselves
in, the
courts have
grafted
exceptions onto
the
generally restricted rule
relating
to the
transferability
of
contractual rights.
As
such,
the law in
this
area
is
unnecessarily complex
and
counter intuitive.
The
legislature
has
merely added complexity
by
creating more exceptions
by
statute.
H.
HISTORY
In
a
feudal
society,
all
lands were owned
by the
Crown.
The
King grant-
ed
rights
in
land
to the
King's
great lords called tenants
in
chief2
in
exchange
for
feudal
obligations.
In
turn,
the
great lords granted lands
to
increasing
wealth
by
allowing more real property
to be
acquired
and
traded.
Without
a
commercially reasonable doctrine
of
asset
assignability,
the
ability
to
mortgage property
would
be
limited. Liquidity
is
also important since
the
value
or
equity
in the
real property
and
other contractual
assets
may be
required
for
other
purposes.
If the
value were locked
in
then
the
generation
of
wealth
would
be
extremely
limited. This fundamental concept
applies
equally
to
other real
property
assets
and
associated
personal
property including contractual rights.
2 R.
Megarry
& W.
Wade,
The Law
of
Real
Property,
6th ed.
(London: Sweet
&
Maxwell, 2000)
at 13.
Assignments
of
Contracts,
Novation,
and
Privity
49
the
lesser lords called demesne
lords.3
The
grants were
in the
nature
of
leases with rents payable
to the
King.
The
rents,
however,
were
so
small
that over time
the
rents were
no
longer collected
and
feudal leasehold
rights became akin
to
ownership.
But
ownership
is
still just
a
bundle
of
rights with
the
ultimate reversion back
to the
Crown.4
The
feudal
obli-
gations included raising arms,
fealty
to the
King, carrying
the
King's
sword,
and the
obligation
to
fund
and
maintain local courts
and
other
high-level royal services.
As
such,
the
land carried with
it a set of
obli-
gations having
the
same
effect
as
covenants.
The
land grant
was at the
pleasure
of the
King
and
could
be
forfeit-
ed as
against
the
feudal
lord
for
many reasons, principally treason
and
sedition.
Originally,
the
land grants were neither alienable
nor
could
they pass
on the
death
of the
lord
to his
heirs
but
were strictly person-
al.
This changed over time
and the
land grants became alienable. They
became
known
as
freehold estates.
The
ability
to
transfer freehold
estates became fundamental
to the
great
and
lesser
lords'
wealth
and
stature.
The
conveyance
of
freehold
estates
was
accomplished
by
livery
of
seisin (the delivery
of
possession). This
was
accomplished
by a
pub-
lic
transfer
of
part
of the
land
(a
clod
of
earth,
a
branch
of a
tree)
to the
acquirer.
This livery
of
seisin worked
for
tangible assets such
as
land
or
equipment.
The
transfer
of
intangible assets
or
contractual
rights,
how-
ever,
was
more
difficult.
The
lesser
feudal
lords,
in
turn, leased
out
their land
to
tenants
called
tenants
in
demesne.5
The
feudal
tenants were also required
to
provide
feudal
duties
to the
feudal
lord
and
generally deliver
a
share
of
the
product produced
by the
land
to the
lesser lord. Feudal duties
included obedience, taking
up of
arms,
and
tithes.
The
holding
of
these
leasehold rights were
at the
pleasure
of the
lord. These
feudal
interests
were akin
to
current leasehold estates.
Feudal
tenants were
not
freemen
and did not
enjoy
the
benefits
of
freemen.
The
tenant
farmers
could
not
transfer
the
leases
to
their chil-
dren
or
others
and
could
be
dispossessed
from
their homes
at the
will
of
the
lord. Over time
the
courts converted these transitory rights into
the
leasehold estate
to
protect
the
tenant
farmers
from
arbitrary
dispos-
session
and
permit succession
and
alienability.
Many
of the
intangible rights
and
benefits
of
feudal
society were
firmly
attached
to
position, service,
or the
bundle
of
rights known
as
3
Ibid.
4
Jbid.
at 12.
5
Jbid.
at 13.
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