Property conveyances between family and friends may often be at less than fair market value. Such transactions may later be attacked on grounds of undue influence or unconscionability. In what circumstances may these conveyances be set aside?
In a recent decision of the Alberta Court of Queen’s Bench, the court considered a transaction in which a young couple had acquired cattle pasture from an elderly neighbour for a purchase price substantially less than the land’s market value. The couple had leased the land for cattle pasture for a number of years before obtaining a right of first refusal as part of their annual lease agreement and subsequently entering into a purchase agreement for the two quarter sections of land at a purchase price of $600,000.00. Shortly following their purchase of the lands, the couple sub-divided the two properties creating a 43 acre property and a 79 acre property which they then listed for sale at a list price of almost $2.2M. The elderly neighbour’s family commenced a court action to set aside the land conveyance on the basis of either undue influence or unconscionable transaction.
In considering these possible grounds to set aside the conveyance, the court commented:
“The plaintiff seeks to set aside the land transaction on the basis of either undue influence or unconscionable transaction. Undue influence considers whether a person truly consented to a transaction, or whether they were somehow unfairly persuaded or pushed into the deal. Relief from an unconscionable transaction asks whether one party knowingly gained an unfair advantage over another due to an imbalance in bargaining power, leading to a grossly unfair or improvident transaction.”
With respect to the issue of undue influence, the court stated:
“The test is whether the potential for domination exists in the nature of the relationship itself. It is only after this relationship is proven that one goes on to look at the improvidence of the transaction (and only if the transaction was commercial in nature) …
“Turning now to the facts of this case, I wish to make it clear that I find there was no potential for domination in the nature of the relationship between [the elderly neighbour] and the [purchasers].
“Instead, I find [the elderly neighbour] and the [purchaser’s] relationship was (1) one of lessor and lessee that (2) developed into a friendship over time due to their shared values as fellow ranchers. They visited with one another when [the couple] were on the land during the spring to fall season and occasionally at other times such as Christmas. They were close neighbours who clearly admired one another, but the relationship did not evolve into one where [the elderly neighbour] depended on the [purchasers] for his day-to-day needs, whether emotional, financial, legal or otherwise. The [purchasers] were not akin to family or in a position of trust. Nor did I hear any evidence to suggest that [the elderly neighbour] was in a position where he needed to sell his land for financial reasons such that he could be vulnerable to influence from the [purchasers].
“On the evidence, I also do not find that [the elderly neighbour] was so vulnerable due to old age that this caused the nature of his relationship with the [purchasers] to have a potential for domination.”
Accordingly, the court concluded:
“The fact of a close relationship between neighbours or even family members is not enough on its own to raise a presumption of undue influence … there must be more, such as instances where the plaintiff has placed their trust in the dependant such as asking for advice or helping in managing their affairs … those facts do not exist here in relation to the [purchasers]. [The elderly neighbour] and the [purchasers] were not in a relationship of dependency …
“I also find that if the presumption had been established, it would have been rebutted as there was no actual undue influence exerted in this case …
“I find that [the elderly neighbour’s] motivation for this sale had little to do with financial gain or maximizing price. [The elderly neighbour’s] primary concern was keeping the lands agricultural and continuing the ranching tradition. In their multiple discussions prior to the sale, [the elderly neighbour] indicated he was willing to sell the lands at half their worth. He knew that if the lands were to remain agricultural a buyer would not be able to pay market value …
Similarly, with respect to the issue of whether the conveyance should be side aside as an unconscionable transaction, the court concluded:
“Although [the elderly neighbour] and the [purchasers] were not family, I find that similar contextual factors were at play in this case. This was ¬not a sale between strangers who were motivated purely by the economics of the deal …
“… I find that although this deal was financially imprudent for [the elderly neighbour], it was a price he was willing to accept for the intangible but important benefit he received of knowing his lands were going to a ranching family. This transaction does not shock the conscience of the Court …
“There was no great disparity in the bargaining power of these two men who had been entering into rental and other agreements that benefited them both for a number of years. This was a deal that was years in the making, was based on shared goals of the parties, and was made when both parties were ready and able.”
In dismissing the plaintiff’s action, the court commented:
“The law has long recognized the importance of respecting an individual’s right to self-determination, including an elderly person’s right to dispose of their own property … I am convinced on the evidence that [the elderly neighbour] was happy with the sale as it fit with his values, beliefs and wishes for his land.”
Property conveyances between family and friends at less than market value may later be subject to attack. Where undue influence is alleged, the court must determine whether the potential for domination arises in the nature of the relationship and, if so, whether undue influence was in fact exerted. For a transaction to be set aside on grounds of unconscionability, mere inadequacy of price is not in iteself sufficient and the court will consider all of the circumstances of the sale including the respective motivations of the parties.