Commercial leases sometimes contain options that allow tenants to purchase the premises they are leasing. The options typically contain a specific purchase price or the formula or method by which that price is to be determined.

Such options were recently considered by the Court of Appeal in 1785192 Ontario Inc. v. Ontario H Limited Partnership. The case serves as a useful reminder to parties exercising an option that non-compliance with the terms of purchase and sale contained in the option may constitute a breach of contract. It is also a reminder of the benefit of resorting to the first principles of contract law when considering complex situations.

Options Concerned Two Commercial Properties in Whitby

1785192 Ontario Inc. and 1043303 Ontario Ltd. own commercial properties in Whitby (the “Landlords”). They leased the properties to Ontario H Limited Partnership (the “Tenant”). The Tenant operated car dealerships on the properties, having purchased the dealerships from the Landlord in 2015. The leases provided the Tenant with options to purchase the properties on which the dealerships were operated.

The option to purchase clause included wording determining the price of the purchase. Specifically, it said that the purchase price was “equal to the average of the appraised fair market value of the Leased Premises as determined by two appraisers, one chosen by the Landlord and one chosen by the Tenant.”

Parties Obtained Conflicting Appraisals and Disputed the Amount of the Purchase Price

In May 2020, the Tenant notified the Landlord it was exercising the options. The parties obtained appraisals. The Landlord’s appraisal valued the properties at over $31 million, while the Tenant’s appraisals valued them at over $11 million. The midpoint between the appraisals was over $21 million. Each party disagreed with the appraisals obtained by the other party.

In September 2020, the Landlord provided draft closing documents that established the purchase price at the midpoint value but reserved the right to claim a purchase price equal to its appraised value if the Tenant did not close. The Tenant purported to close by forwarding the closing documents and transferring just over $11 million to its lawyer to be held in trust pending dispute resolution over the purchase price. The Landlord refused to convey the title.

The Tenant subsequently brought an application for specific performance, while the Landlord brought an application declaring the options null and void and an order for vacant possession, among other things. The Superior Court of Justice ultimately found that the Tenant had validly exercised the options and was justified in tendering the disputed purchase price to its lawyer. Therefore, an order of specific performance was made, directing the Landlord to convey title to the properties in exchange for payment of the midpoint purchase price.

One of the landlord’s arguments on appeal was that the application judge erred in finding that the Tenant had made a valid tender.

An Option is an Irrevocable Offer Open for Acceptance By the Party to Whom It Is Granted

The Court of Appeal referenced the decision of the Supreme Court of Canada in Mitsui & Co. (Canada) Ltd. v. Royal Bank of Canada for its discussion of options. In that case, the Supreme Court of Canada noted that “the exercise of an option is the election to buy property on the terms specified in the option agreement and is the equivalent of accepting the irrevocable offer made in the option.” In other words, the exercise of an option “must mean the acceptance of the offer.” It must also be unconditional and made by the option’s terms.

As such, the Court of Appeal found that the options in issue constituted irrevocable offers to the Tenant to purchase the properties at the price specified in the option clauses. When the Tenant notified the Landlords that it wished to exercise the options, that constituted acceptance, and the Landlords were legally bound to sell the properties to the Tenant for that price.

A Triggered Option Requires the Parties to Take All Necessary Steps to Execute the Purchase and Sale

The option clauses required both parties to obtain fair market appraisals concerning the purchase price. The Tenant argued that at least one of the appraisals obtained by the Landlords was methodologically unsound; however, the Court of Appeal deferred to the conclusion of the application judge that the appraisals were valid. As such, the purchase price was correctly deemed to be just over $21 million (the midpoint value between the appraisals).

The issue then became whether the transfer of just over $11 million by the Tenant to its lawyer was sufficient to constitute tender on closing.

Partial Tender By the Purchaser Was Insufficient and Constituted a Breach of Contract

The Tenant argued that partial tender was sufficient. In support of its argument, it cited cases in which a property purchaser sought specific performance of an agreement at a purchase price that was reduced in recognition of some deficiency with the property (see example Kingsberg Developments Ltd. v. K Mart Canada Ltd.). In those cases, the question was whether the amount posted as security should be reduced due to the deficiency. However, the Court of Appeal distinguished those cases. It said they cannot be relied on as authority because a purchaser can unilaterally withhold a portion of the price in a dispute.

The Court of Appeal thus found that the Tenant had materially breached the contract of purchase and sale by only tendering about half of the purchase price. The appeal was allowed.

For Trusted Commercial Real Estate and Contract Dispute Lawyers Contact Milosevic & Associates

The recent Court of Appeal decision in 1785192 Ontario Inc. v. Ontario H Limited Partnership underscores the importance of understanding and adhering to the terms of purchase and sale options within commercial leases. Non-compliance can lead to significant consequences.

If you have questions about the exercise of options or other commercial real estate or contract disputes, the experienced Toronto litigation lawyers at Milosevic & Associates are here to assist you. Contact us online or by phone at (416) 916-1387 for a consultation.