It is not unusual to find option to purchase clauses in commercial leases. These types of clauses provide tenants with the option to purchase the landlord's building after a specified period, for a predetermined and fixed price.
However, in recent years, as a result of the real estate frenzy, these types of clauses have been wreaking havoc since many tenants find themselves in a position where they may exercise their option to purchase and thus acquire the landlord's building for a price that is way below the market value of the property, in some instances.
On the other hand, while an option to purchase enclosed in a tenant's lease might lead them to believe that the option is valid for the entire duration of the lease, case law on the matter instead indicates that this is not always the case.
In fact, as it appears from the teachings of the Court of Appeal in the Carrière Holdings decision, rendered in 20181, it is clear that a commercial lease and the option to purchase contained therein are two distinct contracts that are not governed by the same rules.
The following question therefore arises : what happens when a landlord decides to sell its building to a third party while an option to purchase has been granted to its tenant and is still enforceable?
The Legal Nature of The Option to Purchase
An option to purchase is a bilateral act that is distinct and independent from the commercial lease agreement, despite being contained therein2. In fact, the case law and literature both specify that the option to purchase grants a personal right to its beneficiary3, the same way that the rights arising from a lease agreement are personal and not real4. Consequently, since the option to purchase is distinct from the lease agreement, it is possible for it to remain in force even upon the expiration of the lease binding the parties, due to the nature of the right it confers5.
In addition, an option to purchase is subject to the legal principles governing promises of sale6. In fact, an option to purchase constitutes a unilateral promise to contract7 by which the landlord binds itself to sell its building to the tenant, who is the beneficiary of the promise. If the tenant decides to exercise its option, the parties are then obligated to complete the sale of the building. It is important to note however that the authors of the literature on the matter consensually agree that the exercise of the option does not automatically produce all the effects of a sale agreement. In fact, the transfer of ownership will only take place at the time agreed upon by the parties, more often than not upon the signature of the deed of sale8.
Opposability of an Option to Purchase
Despite popular belief, and contrary to leases, the publication of an option to purchase at the land registry does not automatically render it enforceable against potential third-party purchasers of the building. As previously stated, an option to purchase grants a personal right to its beneficiary9. Thus, since no real right arises from the option, it therefore cannot be opposed to a third-party purchaser10. Moreover, the option to purchase is neither admissible nor subject to publicity11, despite the fact that it is contained in a lease that is published at the land registry.
Furthermore, it should be noted that the Quebec legislator has specifically excluded personal rights from being subjected to publicity pursuant to sections 2938 and 2939 C.C.Q.
Remedies Available in Case of Breach of The Option to Purchase
In light of the above, we can ask ourselves the following question : what happens when a landlord sells its building to a third party despite having conceded an option to purchase to its tenant on the same building?
In these circumstances, the tenant, who is the beneficiary of an option to purchase, and whose rights have been infringed, can seek compensation for the damages it has suffered as a result of the landlord's breach of contract.
For greater certainty, in the event that the promisor-seller (the landlord) enters a sale agreement with a third party, violating, in the process, the rights arising from the option to purchase, which we saw earlier, is a promise to contract, the sale of the property will remain enforceable against the beneficiary of the promise (the tenant), without prejudice, however, to the latter's legal recourses for damages against the promisor-seller and against the third party, if the third party, in bad faith, acted in full knowledge of the situation12.
Accordingly, it would be possible for the beneficiary of the option to purchase to claim the difference between the current market value of the property and the price provided for in the option13 as damages.
As a result of the foregoing, given that many options to purchase were granted before the real estate frenzy of the recent years, it is in the interest of the property owners, as well as beneficiaries of these types of promises, to inquire about their rights with legal advisors, in order to review and ensure the validity of such options or to obtain proper advice regarding the available remedies that can be pursued.
1. Procureure générale du Canada c. 555 Carrière Holdings inc., 2018 QCCA 2215.
2. Lauzon c. Guertin, J.E. 89-1092 (C.S.); Procureur général du Canada c. 555 Carrière Holdings Inc./Gestion 555 Carrière inc., 2018 QCCS 565, at para. 77.
4. Bruno Verdon, « Nature et formation du bail », dans JurisClasseur Québec, coll. « Droit civil », Contrats nommés 1, fasc. 19, Montréal, Lexis Nexis Canada, loose-leaf, updated June 11, 2017, para. 10; Pierre-Gabriel JOBIN, Le Louage – Collection Traité de droit civil, 2e éd., Cowansville, Éditions Yvon Blais, 1996, para. 8, p. 23-24.
5. Agropur, coopérative agro-alimentaire c. Anjou (Ville), J.E. 2001-439 (C.S.), par. 39 et 40; Lauzon c. Guertin, supra note 2.
6. Lauzon c. Guertin, supra note 2, p. 6.
7. Finance Wentworth (Québec) inc. c. Produits Suncor Énergie, 2019 QCCS 1230, para. 100 ; Pierre-Gabriel Jobin et Michelle Cumyn, La vente, 3rd ed., Cowansville, Éditions Yvon Blais, 2007, para. 33 et seq..
8. Jacques Deslauriers, Vente, louage, contrat d'entreprise ou de service, 2e éd., Montréal, Wilson & Lafleur, 2013, para. 120.
9. Chaput c. Godin, supra note 3.
10. René Gauthier, « La publicité des droits », in Collection de droit 2022-2023, École du Barreau du Québec, vol. 7, Obligations et contrats, Montréal, Éditions Yvon Blais, 2022, p. 276; Jean-Pierre Bousquet, « La publicité des droits », in Collection de droit 2022-2023, École du Barreau du Québec, vol. 7, Contrats, sûretés, publicité des droits et droit international privé, Montréal, Éditions Yvon Blais, 2022, p. 217.
11. Id. ; Procureur général du Canada c. 555 Carrière Holdings Inc./Gestion 555 Carrière inc., supra note 2; Sections 2938 et 2939 C.c.Q.
12. Section 1397 C.c.Q.; Denys-Claude Lamontagne, Droit de la vente, 4th ed, Montréal, Éditions Yvon Blais, 2019, pp. 11 to 24, paras. 20 and 21; Produits Suncor Énergie, s.e.n.c. c. Finance Wentworth (Québec) inc., 2012 QCCS 6287, (appeal dismissed, 2014 QCCA 1175).
13. Lauzon c. Guertin, supra note 2.
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