An “option to purchase agreement” gives a purchaser the exclusive right to purchase a property for a fixed or variable price within a specific period of time. During this time, the property seller is prohibited from engaging in offer negotiations or working with other purchasers. In the commercial real estate realm, an option to purchase is generally structured similarly to an agreement of purchase and sale or a commercial lease agreement. Although the format may vary, the purchaser is still provided with an opportunity to purchase the property at a fixed price, as agreed upon between the buyer and seller.

Despite an option to purchase offering beneficial opportunities to a property purchaser, they can also be subject to opening various risks for the parties involved, particularly in commercial property transactions. This blog will explore various risks associated with an option to purchase in light of a recent decision from the Court of Appeal for Ontario.

Appellant seeks to compel respondents to sell property

In the case of Horn Ventures International Inc. v. Xylem Canada LP, the applicant/appellant, Horn Ventures International Inc. (the “appellant”), had brought an application to compel the respondents, Xylem Canada LP (the “respondents”), to sell a specific property. The application judge previously rejected the appellant’s argument that it triggered an “Obligation to Purchase” clause of an Offer to Lease between the parties, thereby creating a binding agreement for the sale to occur.

Bringing the matter before the Court of Appeal, the appellant argued that the application judge erred in their interpretation of the Offer to Lease and the Obligation to Purchase provision contained therein. Specifically, the application judge was asked to ascertain whether the Obligation to Purchase clause could be triggered before the property’s environmental issues were remedied.

Environmental remediation efforts to be made under offer to lease

The property at the heart of this dispute was 17.6 acres of land in Whitby, Ontario, which also housed a 66,000-square-foot industrial building. The respondents listed the property for sale in 1996. While the appellant was interested in purchasing it, the property was contaminated and needed remediation.

In July 1996, the parties entered into an Offer to Lease under which the appellant agreed to lease the property for 15 years while the respondents agreed to remediate all environmental concerns on the property. The respondents promised to make “all commercially reasonable efforts to complete the remediation within the first ten years of the lease.” If the remediation was not completed within the first ten years, the parties agreed to extend the period of remediation for an additional five years. However, there was no promise that remediation would be completed by a specific date, and the appellant acknowledged that remediation could continue indefinitely.

The lease arrangement was renewed and extended to 2016 and then to July 31, 2021, during which time the respondents were required to “make commercially reasonable efforts to complete remediation.”

Appellant seeks to waive purchase conditions to exercise option to purchase

The Offer to Lease provided that the appellant would be obligated to purchase the property for $1.6 million from the respondents once the respondents:

• Had “completed the Remediation”; and
• Provided an “unqualified and unconditional” certificate from an environmental consultant as to the sufficiency of the remediation.

The appellant argued that the conditions mentioned above were the same and that since it had the right to waive the second condition, it could also waive the first. Further, the appellant argued that if the first condition was separate and distinct, the second condition only benefited the appellant, so it could choose to waive the condition entirely.

Court upholds application judge’s findings

However, the Court of Appeal rejected these arguments. Both the application judge and the Court of Appeal found that the first condition was, in fact, distinct from the second condition. Further, the Court of Appeal also found the second condition benefitted both parties, as the respondents could be held liable for the contaminated land even after the sale had been completed. As a result, they had an interest in remediation.

The Court of Appeal also noted that permitting the appellant to waive the first condition would effectively give it the option to purchase the land at any time. This result would be inconsistent with the respondents’ rights to access the land to perform remediation, and this condition would be classified as an “obligation” rather than an option to purchase.

When was the option to purchase triggered?

The language of the two conditions in the agreement was not as clear cut as it appeared. Although the agreement initially appeared to support the appellant’s position that it could waive the condition of the delivery of the environmental certificate, the Court of Appeal focused on this condition in the context of the broader agreement between the parties, which clearly outlined that the respondents were required to:

• Remediate the property;
• The remediation process could not be guaranteed; and
• Access to the property was required.

These words were interpreted by the Court of Appeal to create a straightforward condition, favouring both parties, that the remediation must be completed before the appellant’s right to purchase crystallizes. In other words, an obligation to purchase, not simply an option to purchase, arose once the respondents completed environmental remediation. Furthermore, the appellant could not waive these conditions to exercise its option to purchase as it did not have one. Instead, the appellant had an obligation to purchase the property upon successful completion of the conditions.

Accordingly, the Court of Appeal dismissed the appellant’s appeal and upheld the application judge’s decision.

The Real Estate Litigation Lawyers at Campbell Litigation Provide Comprehensive Advice on Real Estate Disputes

Whether buying your first home or investing in a commercial property, any real estate transaction is a significant financial investment. Although various agreements and contracts are entered between parties to facilitate such a transaction, unforeseen issues can quickly arise, resulting in litigation. If you are involved in a real estate dispute regarding an abandoned transaction or other contractual dispute, contact the trusted real estate and civil litigation lawyers at Campbell Litigation. Our team regularly provides clients comprehensive and practical advice on their rights and options to preserve them and resolve an ongoing dispute. To learn how we can help you resolve your real estate dispute, contact us online or by phone at 519-886-1204.