2123201 Ontario Inc. v. Israel Estate, 2016 ONCA 409

By Laskin, Pardu and Roberts JJ.A.
Ontario Court of Appeal
May 27, 2016

On appeal from the judgment of Justice Patrick J. Flynn of the Superior Court of Justice, dated January 23, 2015, with reasons reported at 2015 ONSC 538, [2015] O.J. No. 369.

Laskin J.A.:


A.             Introduction

[1]            A sells land to B. At the same time, A and B enter into an agreement that A can repurchase the land if a condition under B’s control is met. Does the agreement give A an interest in the land, or only a personal contractual right? This appeal turns on the answer to that question.

[2]            In 1931, Harold Israel conveyed land he owned in Waterloo County to two individuals, D.M. Bowman and Seranus Martin. The land contained a gravel pit, and the purchasers bought the land to obtain the gravel, sand, and stone on it (collectively “the gravel”). Contemporaneously with the conveyance, the parties signed an Agreement giving Israel the “first option to purchase” the land for $1 once the gravel has been removed from it. But the Agreement gave Bowman and Martin the “discretion” and “authority” to state when all the gravel had been removed.

[3]            The appellant, 2123201 Ontario Inc., is the current owner of the land and continues to extract gravel from it. Harold Israel died in 1980, and his rights under the Agreement have passed to his Estate, the respondent in this appeal. The Estate has registered two notices of claim against the land and in May 2009 demanded that the land be conveyed to it for $1.

[4]            2123201 then brought an application for an order declaring the Agreement void and deleting it from title. The resolution of the application turned on how to characterize Israel’s “first option to purchase” under the Agreement.

[5]            2123201 contended that the Agreement was an option agreement, which gave Israel an immediate, equitable interest in the land. Because his interest in the land had not vested, the Agreement was void and unenforceable under the rule against perpetuities.

[6]            The Estate contended that the Agreement gave Israel a right of first refusal, which was not an interest in land, but was merely a personal right. As the Agreement did not give Israel an interest in land, the rule against perpetuities did not apply and the Estate may still enforce Israel’s “first option to purchase” under the Agreement.

[7]            The application judge dismissed 2123201’s application. He held that the Agreement was not an option agreement that created an interest in land. It was, instead, “something akin to a right of first refusal – which does not create any interest in land”.

[8]            On appeal, each party renews the position it took before the application judge. For the reasons that follow, I would allow the appeal.

B.             Did the Agreement Give Israel an Interest in the Land?

(1)  Ownership of the Land

[9]            I will summarize briefly the history of the ownership of the land.

  • 1931: Harold Israel conveys the land to Bowman and Martin.
  • 1950: A small part of the land is transferred to the County of Waterloo Public School Board to expand its school property. Harold Israel together with Bowman and Martin are the named grantors on the deed transferring the land to the school board.
  • 1965: The land is sold to William Sittler and immediately transferred for no consideration to his solicitor, Robert Sutherland.
  • 2002: The land is transferred into the Land Titles system.
  • 2004: The land is transferred from Sutherland to 3239501 Canada Ltd., a company controlled by William Sittler, for $75,000.
  • 2009: The land is transferred to Sittler Excavating Limited, and in turn to the appellant 2123201 Ontario Inc., for $325,000. 2123201 is operated by Rick Sittler.

[10]        This brief history shows that the Sittler family has owned the land for over 50 years. Although the application judge expressed some concern about whether 2123201 is the current owner, the Estate conceded that it is. Ownership of the land is not in issue on this appeal.

(2)  The 1931 Agreement

[11]        On the same day Israel conveyed the land to Bowman and Martin – January 7, 1931 – the parties entered into the Agreement, which is the subject of this appeal. The Agreement recites that Bowman and Martin purchased the land “solely to acquire the gravel, sand and stone etc., thereon”. The Agreement then contains seven paragraphs said to be “conditions” agreed on by the parties. On this appeal, the important paragraphs are 1, 4 and 6.

[12]        Paragraph 1 gives Israel the “first option to purchase” the land once the gravel has been removed, and gives Bowman and Martin the discretion to state when that has occurred.

The parties hereto of the First Part [Bowman and Martin] hereby in consideration of the sum of One Dollar now paid to them by the party of the Second Part [Israel], the receipt whereof is hereby by them acknowledged, the said parties of the First Part give to the party of the Second Part, the first option to purchase the said lands at the sum of One Dollar which option is exercisable when the gravel, sand and stone, etc., are removed from the said lands. It is at the discretion and within the authority of the Parties of the First Part to state the time that the gravel, sand, and stone, etc., are removed and the said option exercisable.

[13]        Under paragraph 4, Bowman and Martin are not required to remove the gravel by any fixed date. They may remove it “at their own pleasure”, but may not excavate below the level of the road adjoining the land.

It is understood that the parties of the First Part have purchased the lands to acquire the property in the gravel, sand and stone, etc., thereon. They may remove the gravel, sand and stone, etc. at their own pleasure and there is no stated or agreed time within which the said gravel, sand and stone, etc., must be removed. They covenant and agree with the party of the Second Part that they will leave the surface of the property reasonably level when the gravel, sand and stone, etc., have been removed and that no excavation within the boundaries of the said lands will be at a lower level than the travelled surface of the roadway of highway at its lowest point adjoining the property.

[14]        Under paragraph 6, Israel agrees to execute any quitclaim deed needed for widening or altering the adjoining road.

The Party of the Second Part agrees to execute when requested and for a consideration of One Dollar, a quit claim deed of a part of the said lands required in the near future for widening, improving or altering the course of the road now adjoining the property.

[15]        In 1974, Harold Israel registered an assignment on the title to the land, in which he assigned to himself, his heirs, executors, and administrators his rights under the Agreement. Because of this assignment, his Estate may now assert whatever rights Israel had under the Agreement. Then, in 1987, and again in 1997, the Estate registered a notice of claim under the Agreement on the title to the land.

(3)  Options to Purchase and Rights of First Refusal

[16]        This appeal raises one issue: when the Agreement was made, did it give Israel an interest in the land? 2123201 says that the Agreement gave Israel an option to purchase – or perhaps more accurately, an option to repurchase – which created an immediate interest in the land. The Estate says that the Agreement gave Israel only a right of first refusal, a personal right, which did not create any immediate interest in the land.

[17]        Both parties agree that if the Agreement did give Israel an immediate interest in the land, then the Agreement is void and unenforceable because it offends the rule against perpetuities. The parties also agree that if the Agreement merely gave Israel a personal contractual right and not an interest in the land, then the Estate may still enforce its rights under the Agreement.

[18]        The difference between options to purchase and rights of first refusal has been discussed extensively in the jurisprudence of the Supreme Court of Canada and this court, although the jurisprudence has been the subject of some criticism: see Irving Industries (Irving Wire Products Division) Ltd. v. Canadian Long Island Petroleums Ltd., [1975] 2 S.C.R. 715; McFarland v. Hauser, [1979] 1 S.C.R. 337; Metropolitan Homes Ltd. v. Politzer, [1976] 1 S.C.R. 363; Benzie v. Kunin, 2012 ONCA 766, 112 O.R. (3d) 481; and Harris v. McNeely (2000), 47 O.R. (3d) 361. For a critique of the early jurisprudence, see the excellent article by Paul Perell (now Perell J. of the Ontario Superior Court of Justice): “Options, Rights of Repurchase and Rights of First Refusal as Contracts and as Interests in Land”, (1991) 70 Can. Bar Review 1, at pp. 17-27.

(a)  Options to Purchase

[19]        An option to purchase gives the option holder the right but not the obligation to purchase land. In Canadian Long Island Petroleums, Martland J. succinctly defined an option to purchase and emphasized the option holder’s control over the exercise of the option. In his words at p. 732: “the essence of an option to purchase is that, forthwith upon the granting of the option, the optionee upon the occurrence of certain events solely within his control can compel a conveyance of the property to him.” An option holder has an equitable interest in the land, contingent on the holder’s election to exercise the option. Because an option to purchase creates an interest in land, it is specifically enforceable at the time the option is granted. But to remain valid the option must be exercised within the perpetuity period.

[20]        The perpetuity period is “not later than twenty-one years after some life in being at the creation of the interest”: see, for example, Sutherland Estate v. Dyer (1991), 4 O.R. (3d) 168 (Gen. Div.), at p. 171. An interest that vests outside this period is void. As Killeen J. explained in Sutherland Estate, at p. 172, the rule against perpetuities is a rule invalidating interests that vest too remotely. And it is a rule that applies not just to owners of land, but also to holders of contingent interests, such as options to purchase.

It is stating the obvious to say that the central purpose of the rule was to prevent owners of property from exercising control over their property for too long a time after they ceased to be owners. However, the rule does not implement this purpose by restricting the duration of interests in trusts or other interest in property. Rather, the rule restricts the length of the interval which may elapse between the creation of a contingent interest and the vesting of that interest. Thus, the rule applies only to contingent interests and, to that extent, it has been said by many commentators that the rule should be really characterized as a rule against remoteness of vesting.

[21]        In the present case, the perpetuity period ended in 1952 (21 years after the Agreement was signed) or 2001 (21 years after Harold Israel died). It is unnecessary to decide which date is appropriate. If the Agreement is an option to purchase, which creates an interest in land, that interest still has not vested; therefore even if 2001 is the appropriate date, the option to purchase is void.[1]

(b) Rights of First Refusal

[22]        A right of first refusal is a commitment by the owner of land to give the holder of the right the first chance to buy the land should the owner decide to sell. Typically, where a land owner is prepared to accept an offer to purchase from a third party, the holder of the right of first refusal will be given an opportunity to match the offer; or, when an owner of land decides to sell and fixes the sale price, the holder of the right of first refusal will be given the first chance to buy at the fixed price. In these typical right of first refusal scenarios, the owner has an unfettered discretion whether to sell and when to sell.

[23]        Importantly, the right of first refusal is a personal right. It does not create an immediate interest in land: Canadian Long Island Petroleums, at p. 735. Thus, it is not immediately enforceable by an action for specific performance. If, however, an owner of land receives an offer to purchase that it is prepared to accept, then the right of first refusal is converted into an option to purchase. At that point, the holder of the right of first refusal has an interest in the land, which can be specifically enforced: Harris, at para. 12.

(c)  Summary

[24]        As the discussion above shows, the jurisprudence establishes that options to purchase create immediate interests in land; rights of first refusal do not. Options to purchase are specifically enforceable; rights of first refusal are not. And options to purchase are subject to the rule against perpetuities; rights of first refusal are not. Finally, according to Canadian Long Island Petroleums, options to purchase give the option holder control over the decision to effect a conveyance. Rights of first refusal give the land owner control over the decision to convey. But, as I will discuss, other case law shows that in some circumstances control over the exercise of the option is not determinative.

(4)  Analysis

[25]        The “first option to purchase” the land given to Harold Israel under the 1931 Agreement does not fit precisely into either the definition of an option to purchase or the definition of a right of first refusal established in the jurisprudence.

[26]        It is not precisely a simple option to purchase or repurchase as defined in Canadian Long Island Petroleums because the event triggering the ability to exercise the option – the removal of all the gravel from the land – is not within the control of the holder of the option, now Israel’s Estate. Thus the Estate cannot immediately exercise its option. Its ability to do so depends on 2123201’s determination that the gravel has been removed.[2]

[27]        And Israel’s “first option to purchase” the land is not precisely a simple right of first refusal. No third party is involved, and more importantly, 2123201 does not have an unfettered discretion to decide if and when it will sell the land. It must offer to sell the land to the Estate when all the gravel is removed. Although 2123201 may remove the gravel at any pace it chooses and has the discretion to decide when all of it has been removed, that discretion is not open-ended. It must be exercised reasonably.

[28]        That a discretion given to a contracting party must be exercised reasonably is clear from the authorities. For example, inNareerux Import Co. Ltd. v. Canadian Imperial Bank of Commerce, 2009 ONCA 764, 97 O.R. (3d) 481, at para. 71, Blair J.A. wrote:

Contracts in which performance is dependent upon the exercise of discretion on the part of one of the parties are contracts that are particularly characterized by the implied duty of good faith performance. In such circumstances, the discretion must be exercised reasonably and in good faith. [Citations omitted.]

[29]        Professor John McCamus makes the same point in his text, The Law of Contracts (Toronto: Irwin Law, 2012), at p. 849 and 865-6:

In sum, these cases establish the proposition that where discretionary powers are conferred by agreement, it is implicitly understood that the powers are to be exercised reasonably.

In the control of contractual discretion cases, for example, it may be more realistic to suggest that the implied limitation on the exercise of the discretion is intended to give effect to the ‘reasonable expectations of the parties.’

[30]        The application judge recognized that Israel’s “option” did not fit exactly into the definition of a right of first refusal. He characterized it as “akin to a right of first refusal”. But he concluded that the “option” was not really an option to purchase because Israel did not control the exercise of the option, and thus could not specifically enforce it at the time the Agreement was made.

[31]        I take a different view. Israel’s and now the Estate’s inability to control the exercise of the option is not, in this case, decisive. Instead, I focus on what the parties intended by their Agreement. In my opinion, the true intent of the parties was to give Israel an interest in the land at the time the Agreement was made.

(a) Control

[32]        Israel’s lack of control over the exercise of his option figured prominently in the parties’ submissions. The Estate, relying on Martland J.’s definition of an option to purchase in Canadian Long Island Petroleums, submits that Israel had only a personal right to repurchase the land. 2123201, on the other hand, submits that “control” is not determinative and, even in its absence, Israel still had an equitable interest in the land. I agree with 2123201’s submission.

[33]        The case law in the Supreme Court of Canada on the relevance of control has not been uniform. And this court has said that control over the exercise of an option does not always resolve whether the option gives rise to an interest in land: Jain v. Nepean(1992), 9 O.R. (3d) 11 (C.A.), leave to appeal refused, [1992] S.C.C.A. 473.

[34]        Canadian Long Island Petroleums makes no mention of two earlier Supreme Court of Canada decisions – City of Halifax v. Vaughan Construction Co. Ltd., [1961] S.C.R. 715, and Weinblatt v. City of Kitchener, [1969] S.C.R. 157 – each of which reached a different conclusion. In both those cases, a city sold land to a developer but retained an option to demand a reconveyance should the developer not build within a specified time. In other words, the city’s right to demand a reconveyance, like Israel’s option to purchase, was not within the city’s control. It depended on the developer’s decision whether or not to build. Yet in both cases the Supreme Court of Canada concluded that the covenant to demand a reconveyance gave the City an equitable interest in the land.

[35]        Then, in Jain, this court considered the issue afresh in the light of the Supreme Court’s jurisprudence. In Jain, as in Vaughanand Weinblatt, the City of Nepean sold property to a developer under an agreement that gave it the right to repurchase the property if the developer did not construct a building of a specified minimum size within a specified time. This court had to decide whether the agreement gave Nepean an interest in the property or merely a personal right of first refusal. This court held that the agreement gave Nepean an interest in the property.

[36]        Carthy J.A., writing for the panel, pointed to the “apparent inconsistencies in the reasoning of the courts” in VaughanWeinblatt,and Canadian Long Island Petroleums. And he noted that the latter case did not refer to the two earlier cases. He followed Vaughanand Weinblatt and concluded, at p. 19, that control was not determinative:

A person who acquires property with notice of a third party's right of purchase in the event of failure to construct a building takes subject to that option. Control of the exercise of the option is not a factor.

[37]        In both Jain and the case before us, the right to repurchase was not within the control of the holder of the right. In Jain, Carthy J.A. concluded that control was not decisive. By their agreement, the parties still intended that Nepean maintain an interest in the land. Similarly, in the appeal before us, control over the exercise of the option does not resolve whether the Agreement gave Israel an immediate interest in the land. That issue can only be resolved by looking at what the parties intended.

(b) The Intent of the Parties

[38]        Instead of focusing on the question of control, I view the issue as one of contract interpretation: to determine the true intent of the parties at the time the Agreement was made. In my opinion, the purpose of the Agreement, the context in which it was made, its terms, and the conduct of the parties under it, show an intention to give Israel an option to repurchase the land, which gave rise to an immediate, equitable interest in the land.

[39]        Bowman and Martin bought the land from Israel for one purpose only: to extract the gravel from it. They had no other interest in the land. Once the gravel was removed, Israel could have his land back for $1. The purpose of the Agreement and the underlying context in which it was made suggest Israel was being given not a mere personal right of first refusal but an option to repurchase, which created an immediate interest in the land.

[40]        The terms of the Agreement bolster this conclusion. In paragraph 1 of the Agreement, Israel’s right is termed a “first option to purchase”, not a right of first refusal. Although the label by itself is not determinative, paragraph 6 also shows that the parties intended that Israel have an immediate interest in the land. Under that paragraph, Israel agreed to execute a quitclaim if part of the land was needed to widen or alter the road adjoining the land. If all Israel had was a right of first refusal, he would not have had to quitclaim anything. But if he had an equitable interest in the land created by an option to purchase, he would have had to give a quitclaim.

[41]        Any doubt, however, about the parties’ intention when they signed the Agreement has been resolved by how the parties have acted under the Agreement. The way parties act under an Agreement may be helpful in determining its intended meaning when there is doubt about the appropriate interpretation. The parties’ later conduct may show what meaning they gave to the Agreement after it was made, which in turn may show the parties’ intent when the Agreement was made: Montreal Trust Co. of Canada v. Birmingham Lodge Ltd. (1995), 24 O.R. (3d) 97 (C.A.), at p. 108.  

[42]        Here, the parties’ later conduct shows that they viewed the Agreement as creating an immediate interest in land. In 1950, when a portion of the land was conveyed to the school board, Israel joined Bowman and Martin in the deed as a grantor. He would not have had to do so if he only had a personal contractual right of first refusal.

[43]        The purpose of the Agreement and the context in which it was made, its terms, and the later conduct of the parties under the Agreement, together show that the intent of the Agreement was to give Israel an immediate, equitable interest in the land. The interest was contingent on the exercise of the option to purchase. As the option has not been exercised, the interest has not vested within the perpetuity period and is now void.

[44]        My view of the parties’ rights under the Agreement differs from that of the application judge. Since the Supreme Court of Canada’s decision in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, ordinarily a trial or application judge’s interpretation of an agreement is entitled to deference from an appellate court. Here, I doubt deference is warranted. The application judge did not interpret the Agreement. He looked only at the question of control over the exercise of the option. But even if deference is warranted, this court is entitled to intervene. The application judge’s conclusion that Israel had only something akin to a right of first refusal was an unreasonable conclusion, justifying appellate intervention.

C.             Conclusion

[45]        I would allow the appeal, set aside the judgment of the application judge, and in its place grant the relief sought by 2123201 Ontario Inc., together with costs in the agreed on amount of $15,000 inclusive of disbursements and applicable taxes. 2123201 Ontario Inc. is also entitled to the costs of the application in the amount ordered by the application judge, $15,000.

Released: May 27, 2016 (“J.L.”)

“John Laskin J.A.”

“I agree. G. Pardu J.A.”

“I agree. L.B. Roberts J.A.”

 


[1] It is void both at common law and under the Perpetuities Act, R.S.O. 1990, c. P .9. Section 4 of the Act prescribes that every contingent interest is presumptively valid, and establishes a “wait and see” rule. Even under this rule, Israel’s option to purchase would be void, as it did not vest within the perpetuity period.

[2] Perell terms rights of repurchase accompanying a sale of land, but dependent on the decision of the owner of the land, a complex right of repurchase: at p. 7.