What is the Doctrine of Merger?
The Common Law doctrine of merger establishes the rules associated with how interests in real property and personal property are regarded and treated by the law. Under this doctrine, once two estates or interests come to be held by one person, and does not involve any element of time (such as a life estate in fee simple subject to a life estate), the larger interest will destroy and consequently merge the smaller ones into it. This concept helps to avoid confusion as to which party in that real estate transaction has the right to exercise certain powers and privileges.
In real estate transactions, particularly, the doctrine of merger applies almost automatically to the entirety of the land and the buildings on it, including such things as artificially constructed structures, vegetation and natural minerals below the property line. So, for example, when John Smith transfers some land he owns, known as Lot A, to a third party (let’s say Barry) with the understanding that the transfer is contingent upon Barry transferring to John his adjoining Lot B , the doctrine says that the properties will merge into one lot and that any restrictions that were placed on each lot will therefore be voided.
There are several exceptions to the doctrine of merger that may apply, and that sometimes must be formally enacted through the use of different legal structures. One such exception is found in condominium conversions, where a developer may buy vacant land, build a condominium and then sell the condominium units to individuals. If the developer owns the whole parcel of land, the entire parcel will be merged and it will be unclear who owns which segments of the parcel. To address this, it is common to have legal documents prepared, such as a white paper or declaration of covenants, that will list the addresses of the individual units as well as the respective owners of the units. This conveys ownership for all segments of the parcel to the individual owners, and will, in turn, prevent the entire parcel from being merged into the developer’s original property after the transfer.
A Short History of the Doctrine of Merger
The doctrine of merger may be traced back to the 9th century in England when it regulated the rights and remedies of clergy sub-tenants in the Context of the "Mitigation of waste". It provided that one of three alternatives must be met to avoid merger with regard to real property: separation of the estates through specific actions or provisions, continuance of the smaller estate past the larger estate, and determination of a right. The doctrine was developed further in 19th century England, in the cases of Unwin v Babb (1823) 1 & 2 M & W 303; Cantlow v Underwood (1888) 21 QBD 347 Forster v Hale (1891) 6 TLR 1056 and Lowe v Peers (1861) 6 LT 31, among others. These cases indicate that the doctrine of merger evidences a strong feeling in England that a person may not hold two distinct rights to the same thing at the same time.
Modern decisions regarding the doctrine of merger in England indicate that it has been more clearly defined and accepted in non mortgage scenarios, such as the decision in Moore v Moore (1970) 22 P & CR 132. In addition, merger is applied in a much more limited manner than it used to be, and its application is more discretionary. Furthermore, the idea that merger is a common law concept seems to have been rejected in the late 1990s. See the case of Johnson v Buckland (1998) 72 P & CR 30.
The English case law on merger accepts the presence of a contract relating to the particular land as a means of avoiding the doctrine. After McFall, the discretion of the courts regarding the doctrine of merger and its application seems to be limited. This is true despite the Murphy v Stone [1999] WTLR 797, which stated that there was no crucial question of fact or point of law in their appeal for the House of Lords and therefore no reason for the appeal to be heard.
The Australian case of Chocolate Factory [1967] VR 479 closely mirrors the aforementioned English decisions. There are some exceptions to this doctrine in the area of interests in land (such as mortgages, covenants and reservations) before the merger doctrine becomes applicable. In Chocolate Factory, the doctrine of merger did not apply because of the express wording in the lease that made it clear merger was not intended. The court indicated that although it was clear that the rule of merger is not essential, it was not established in all cases. The doctrine of merger must yield to statutory and other overriding provisions.
When discussing the merger doctrine in Canada, the case of Meyer v Town of Union [1899] 29 OR 455 refers to the English cases discussed above. It cites the Cantlow case as a good statement of the merger doctrine, but then acknowledges that the Ontario case cited does not indicate how merger would be applied to a mortgage agreement.
The US does not seem to have a specific case on the merger doctrine. However, merger of estates in real estate does seem to apply in the same way that it does in England. The various states will mirror the decisions of the English Court, but states such as Wisconsin (State of Wisconsin v Lueck [1976] 237 NW 2d 74 (Wisconsin, 1976)) have held that merger would not apply in situations of merger of land held by mortgagor.
The legislative conception of merger in Canada, as stated in the Estates Act of British Columbia, mirrors English rules. The doctrine of merger varies from province to province and depending on the situation. There is consideration of the application of the doctrine in situations such as reserving a life estate and limitation of a condition precedent.
The doctrine of merger was developed in the late 9th century and was further defined in the 19th century in English law. It is a common law doctrine and incorporates statutory provisions in certain provinces in Canada. Merger may be avoided by a contract, both in England and in Canada. The present status of the doctrine is strongly influenced by English decisions.
Fundamental Principles of the Doctrine of Merger
The Doctrine of Merger of Title involves certain conditions and sound principles of equity to operate. The first essential principle is that, when there is a conveyance of a greater and a less estate, or of a greater and less quantity of the thing granted, in the same property, the greater estate or quantity must merge into the less estate or quantity. For example, the conveyance of an estate for life, in the same property and to the same person in whom the fee simple has been granted, merges into the fee simple and lawfully extinguishes it; but a grant for an estate of inheritance or fee simple will not merge into a particular estate for life. The conveyance to the grantee and his heirs will not operate to defeat his particular estate for life and thus deprive him of the remainder over.
So, if a greater estate than the one intended to be granted is granted, the condition of merger will obtain.
A second principle of the doctrine is that where the two estates are in different grants, or titles, or writs, as of an estate for life and a fee simple, the lesser estate does not merge in the greater estate, but remains subordinate to the greater estate, unless they vest in the same person, because the latter cultivates all estates and remainders, where otherwise their operation would be inconsistent. This educational principle is not of course attended to, because the lapse of time and the general capacity of man effect the similar cultivation of things of a different nature. When the same person becomes owner of both the greater and lesser estates, the personal inconvenience of administering them, which is the inconvenience which gives rise to the doctrine, is not regarded by the courts because it only exists in the imagination.
The difficulties and inconveniencies which would arise from an ordered society abandoning its general system of salable land, can hardly be contemplated or enumerated. There is no real danger of a court sacrificing any interest or right of the owners of land of incumbering parties, by disallowing any valid conveyance, from motives of public policy, and thus disregarding the very basis of all property, private right. The law is willing to answer the prayers of any party, and only grants such prayers on their own merits. The court lives by rules, and cannot decide anything, however legitimate the reasons adduced in favour of its being decided further than its own rules permit. The discretion of any judge, when acting on its own authority, is always beyond control, though witness may be brought to bear testimony to the correctness of his facts and evidence; but his jurisdiction is not subordinated to the evidence of the fact or the tenor of the particulars of the case.
Again, we may add another principle of the doctrine: when an estate in fee belongs to a man by descent, the entry of him and his heirs amounts to an occupancy, which destroys the prior less estate. The conveyance to the stranger or invasion by trespass of the adjacent improvement does not interpose between them and, gives respect to the prior estate, because the stranger will upset its owner by means of his own right. This destruction of an estate in a prior tenant, as a consequence of the estate of a subsequent tenant or the stranger and not as the result of any contract or act of the prior tenant, is the great basis of the doctrine of merger, and the only principle of public policy which obtains in it.
These principles must be kept in mind in order to carry out the effects of the English doctrine of merger, and the discussion of the doctrine of merger in this country must proceed upon them, and not from a different perspective of the land system.
Modes of Merger
Although the doctrine of merger is commonly triggered by the merger of estates, it may also be triggered by the merger of lesser interests such as easements and leaseholds. The two types of merger that apply to easements and leaseholds are: (1) merger of easements; and (2) merger of leaseholds.
Merger of Easements
When two easements (e.g., a right-of-way and an overhead encroachment) held by the same party are situated on the same parcel of land, there may be a merger. A party who has a right of way for a road acquires another right of way for an overhead wire over the same property. Each easement is a servitude on the land owned by the owner of both rights. Although the easements may run in different directions, the benefits of both can be enjoyed in the use of the land. In such case, the two easements may be merged, and there will be only one servitude for all of the rights of way. Where two easements merge, the continued existence of either easement is subject to the general rules of lost or abandoned easements.
Merger of Leaseholds
When two leaseholds exist in the same estate, there will be a merger of the leases into a single larger lease, unless some action to the contrary is taken prior to the merger. However, once the merger has occurred, the tenant may not unilaterally split the merger by severing the moiety from the remainder.
Effect of the Doctrine of Merger
In large part, the doctrine of merger merely arrives at a logical result. For example, when an option is exercised, the lessee has moved from one estate (leasehold) to another estate (fee simple) and since the option to purchase had been granted for mere consideration, it makes sense that the promise to purchase would merge with the grant to convey. The operation of the doctrine in lesser scenarios is not as clear and requires consideration of the terms of the pertinent real estate documents. In addition, some instances simply seem unfair. But, it is how we resolve such inequities in the law. As a practical matter, the doctrine of merger does not go away, so parties to real estate transactions should carefully consider the implications when obtaining or granting property interests. If documents are silent on the applicability of the title doctrine, the law will assume the doctrine applies, so the drafter should consider the applicability of the doctrine when drafting and review the application of the doctrine of their agreement before closing.
Exceptions of the Doctrine of Merger
On its face, it would appear that the doctrine of merger is an absolute in Canadian property law. Most, if not all, of the cases and decisions involving the doctrine of merger end with a variation on the same theme: the real estate purchases are deemed to have merged upon their registration. However, as is often the case, the law is far from simple and depends on the specific facts of each individual case. There are numerous exceptions to the doctrine of merger, such as: (i) where the interests of the parties are not alike, as has been the case with a landlord or tenant merger (a common scenario in Ontario for unit owners under portions of the Act that permit common elements and units in the same name); or (ii) where there is a mere change in the form of the title from one form to another as opposed to a change in ownership (e.g. a merger of joint interest). This exception to the doctrine was explained well by Justice Aylen in the case of 375304 lst Street Products Ltd. v. Pеха 126 Fam . Ct (No. 57458/97) at p.196, 1998 Carswell50 (Ont. Cтоt.). Interesting to note, Justice Aylen concluded in 375304 lst Street Products Ltd. v. Pеха 126 Fam. Ct (No. 57458/97) that "the doctrine of merger does not generally apply where the transferor and transferee are the same legal entity in the eyes of the law. In these circumstances the title to the property remains the same". Thus, if the floor of your unit us in your name, a merger from fee simple to condo common element with respect to the land below would be questionable (due to the aforementioned unit in your name). Alternatively, the fact that you are required to hold in fee simple for purposes of lending would also likely prevent a merger, despite the registration in the same name. Most exceptions to the doctrine require a manual search of the chain of title. Each case must be reviewed on a case-by-case basis. The important thing to remember is that the doctrine of merger, while appearing absolute, is not.
Judicial Pronouncement
The doctrine of merger has not gone without its criticisms and re-interpretations since its inception. In Mohamad Noor Shamsuddin v Injaz Asia Construction Sdn Bhd [2009] 8 CLJ 601, it was stated that in the event there are two or more documents and one is incorporated into the other, the terms of the second document incorporated by reference will only be binding if the document incorporates the first document with complete certainty. This means that the specific words and phrases to which both documents refer must be identical, so that the meaning of those phrases or words must be the same. For example, it would be contrary to the doctrine of merger to incorporate a second contract which referred to the first contract as "the contract", as "contract" would usually refer to the second contract which did not incorporate the earlier contract.
There are a number of relevant cases on the doctrine of merger in Malaysia. In Ramu & Bro Sdn Bhd v Municipal Council Muar [1991] 2 MLJ 664, the court held that the doctrine does not operate to vest property if it is impossible for all parties, with a legal interest in the property, to convey their title.
In Kurnia Setia Sendirian Berhad v Perbadanan Kemajuan Bukit FRP [1997] MLR 260, the defendant’s security over a property was lost to the plaintiff because of a failure to register the registered deed. The court held that although the document was not registered properly, it would be registered by operation of law on the doctrine of merger.
In Wong Cheng Ngee v Bank Bumiputra (M) Berhad [1995] 3 MLJ 469, the court held that when the title to the land was incorporated into the charge given for the loan, the charge deed showed that the vendor constituted the plaintiff as its agent to execute an instrument for the purpose of effecting entry of the plaintiff as the registered owner of the land into the Land Registry. The doctrine of merger operates to prohibit the creation of two distinct titles or two different owners.
In Anor Singh Karamji v Lam Ah Loo [1995] 3 MLJ 61, the court held that the doctrine of merger will not apply if the operation of the doctrine would not fulfil the purpose of the mortgagee in taking the security from the mortgagor.
Practical Implications for Lawyers
When advising clients on property transactions, it is critical to consider whether they may bring about merger. The starting point for this question is to ask whether the two interests are connected, in that they may be viewed as different manifestations of the same property interest. A tenancy that borders a freehold interest may be connected to that interest, or it may not. It may be apparent to a lawyer that the two interests are different manifestations of the same property interest, in which case merger may be likely and the risk of adverse tax consequences considered. Merge arises post-closing, it is critical to ensure that the client continues to have the independence it requires: a merged interest is treated as a single asset for tax purposes, leaving no separate basis for each piece of property. This can result in a major capital gains exclusion downside.
If a merger is likely, the next step is to consider the circumstances underlying the property transaction. Bankruptcy issues, execution issues, and a variety of other factors may arise, which means the possibility of an unwanted amalgamation of property interests. If it is necessary to avoid the countervailing merger, there are available strategies to do so, including contractual obligations, renunciations, and mechanism whereby the merged interest is recognized on title. It is recommended that if possible, a certificate of independency be used.
Conclusion
In conclusion, the doctrine of merger has both downsides and upsides for a purchaser – and on balance the impact is favourable. The buyer of a property cannot be fooled into making significant changes to its rights by the seller unless the change is reflected in the written agreement. There is also a huge incentive for the seller to settle the mortgage obligations on title.
On the other hand, a downside for purchasers is that their bargain may be harder to enforce. In addition, the agreed time to close may be extended by the failure of the seller to fulfill all of the seller’s obligations. The doctrine also creates incentives for sellers to do everything possible to ensure the elimination of any encumbrances against title.
Are there still situations where the doctrine of merger plays a significant role? Yes, in those situations where a purchaser and seller have entered into a binding written agreement of purchase and sale but have not completed the transaction, and then later enter into a second (possibly informal) deal . If there is a covenant registered against the property, it will stay there even though you later complete a transaction under an agreement of purchase and sale that does not require the discharge of existing mortgages or covenants.
The doctrine of merger was at its zenith in the 1970s. However its relevance has faded. There were two reasons for this. First, lawyers in Ontario became more diligent and made sure that their agreements of purchase and sale included provisions requiring that all encumbrances on title be discharged. In the 1990s, the Law Society even amended the standard form agreements to require that existing encumbrances be removed and endorsed discharges be filed in the Land Registry Office.
Second, banks in Ontario started to pay off all obligations on title as a condition of closing new agreements of purchase and sale. Without the obligation to ensure the removal of mortgages and covenants from title, sellers therefore lost the incentive to negotiate carefully at the time of the transaction. And sellers have become sufficiently wary about signing documents that would make them liable for a small amount of money later that they are now reluctant to leave the obligation to pay off an encumbrance until after closing.