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| Ray Mikkola |
First, a brief summary of the facts:
A temple, located in a commercial condominium unit in Brampton, Ont., expanded into an adjoining condominium unit pursuant to an oral lease arrangement. A couple of years later, in 2016, the mortgagee of the adjoining unit went into possession.
The temple and the adjoining unit mortgagee in possession signed a lease for a six-month term, which contained an option in favour of the temple to buy the adjoining unit for $350,000. In 2017, the temple exercised the option, but no closing occurred due to lack of funds. In 2018, the adjoining unit mortgagee assigned the mortgage to a new mortgagee. The new mortgagee increased the rent.
In 2023, the new mortgagee issued power of sale and sold the adjoining unit to a new owner for $750,000. No notice of the power of sale was given to the temple. The new owner terminated the month-to-month lease and moved to evict the temple. The temple exercised the option to purchase the unit for $350,000. The new owner refused to close. A motion judge found for the temple and confirmed that the option to purchase for $350,000 was properly exercised and ordered specific performance against the new owner. The new owner appealed on the basis that the option was not registered.
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The decision of the Court of Appeal in this case and the facts, as far as we know them, are important to real estate lawyers even beyond the narrow purpose for which the matter was remitted back to the lower court. These include the following considerations and lessons for careful practitioners:
1. Lease agreements for real property should never be oral. Any option to purchase land must be reduced to writing and should be registered on title. An option to purchase is an interest in land, and its registration on title attracts the obligation to pay land transfer tax. The tax is calculated on the amount paid to acquire the option, not on the price to purchase the land. However, there may be an obligation to pay land transfer tax on the full purchase price if the option is registered after it has been exercised, since its exercise transforms it into an agreement of purchase of sale. Notice of a purchase agreement may be registered on title as a caution, at which time land transfer tax on the full purchase is typically payable. Once the transaction closes, no additional land transfer tax is payable. If the transaction does not proceed to completion, an application may be made to obtain a return of the land transfer tax paid at the time of the registration of the caution.
2. Even absent registration on title, a new owner may be bound to the terms of an option if it had actual notice of the option. Actual notice trumps the requirements of the Land Titles Act that most encumbrances must be registered on title in order to bind third parties in their dealing with title to the land, as held in United Trust Co. v. Dominion Stores Ltd., [1977] 2 S.C.R. 915. This also means that purchasers and their lawyers should sometimes be careful not to review certain searches when undertaking due diligence, lest they learn something about title that would otherwise not have bound them.
3. As set out above, bona fide purchasers of real property for value without notice of an unregistered interest could take title free and clear of such interest. Of course, it is necessary for the purchasers actually to be bona fide. In this case, for example, it is not known if the purchaser and the new mortgagee were controlled by the same person or were otherwise acting not at arms’ length from each other. The purchaser should not be permitted to conspire with the seller to avoid the option. Somewhat suspiciously, the new owner did not apparently plead that it had no knowledge of the option to purchase, but merely that “the option to purchase was not registered on title, and that there is otherwise no evidence that the [new owner] was aware of the option to purchase” when it purchased the unit.
4. A properly drafted option agreement should contain all necessary details to create a valid and enforceable purchase agreement immediately and automatically upon the exercise of the option. At a minimum, the parties, property, purchase price and closing date must be set out in the document. In this case, a closing date seems to be missing from the option. To ensure enforceability, a lawyer preparing an option agreement might consider adding a full purchase agreement as a schedule to the option agreement and even arranging to have the purchase agreement signed and held in escrow pending the exercise of the option. Necessary closing matters that are missing from the option agreement may result in a problematic closing once the option is exercised and might even cause the resulting purchase agreement to be unenforceable. Leaving important details to be worked out later by the parties if and when the option is exercised is unwise. An “agreement to agree” is generally unenforceable.
5. An option, once exercised, becomes an agreement of purchase and sale. So why didn’t the 2017 exercise by the temple of the option, which resulted in the sale not closing due to lack of funds, exhaust the option? This matter is not raised in the decision.
6. An option to purchase is an interest in land, so lawyers drafting and reviewing it should consider the rule against perpetuities. The rule may be engaged after 21 years for corporations in Ontario.
7. An unregistered lease can encumber title to property where there is actual possession under it, where it is for a period yet to run that does not exceed three years, as set out in s. 44 (1), para. 4 of the Land Titles Act. This matter was not argued in this case.
8. The court appeared to have no issue with the proposition that a mortgagee can be “in possession” of a property that is leased to and actually occupied by a tenant. In this case, possession of the tenanted unit by the mortgagee may not have been relevant to the outcome. But in other circumstances, possession by a mortgagee may affect the owner’s and subsequent mortgagee’s rights. For example, s. 2 of the Mortgages Act provides that an owner or a subsequent encumbrancer who has a right of redemption, and who exercises such right, is entitled to require that the mortgagee must assign the mortgage to any third person, instead of giving a discharge of the mortgage. However, there is no right to require an assignment where the mortgagee is in possession (see s. 2(3) of the Mortgages Act). A mortgagee in possession may also be liable for environmental contamination claims associated with the property and may be liable personally for the payment of condominium common expenses (as the definition of an owner of a unit in the Condominium Act expressly includes a mortgagee in possession).
Ray Mikkola is a partner with the firm of Pallett Valo LLP.
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