Court Of Appeal Rules That Purchase Option Mechanics Must Be Followed

In 1785192 Ontario Inc. v. Ontario H Limited Partnership (2024 ONCA 775), the Court of Appeal of Ontario ("Court of Appeal") reversed the lower court's decision, determining that a purchaser breached an agreement of purchase and sale for two commercial properties by unilaterally withholding a portion of the purchase price pending the resolution of a price dispute.

The Court of Appeal's decision emphasizes the importance of strict adherence to contractual terms when exercising purchase options.

The Facts

The appellant landlords, 1785192 Ontario Inc. and 1043303 Ontario Ltd. (together, the "Landlord"), leased two commercial properties in Whitby to the respondent tenant, Ontario H Limited Partnership (the "Tenant"), who had purchased automobile dealerships that operated on such properties from the Landlord pursuant to an asset purchase agreement (the "Agreement").

The dealerships were operated pursuant to leases contained in the Agreement. The leases included an option for the Tenant to purchase the two commercial properties on which the dealerships were operated (the "Purchase Option"), at a price determined by taking the average of the appraised fair market value of the properties determined by two appraisers, one to be chosen by the Landlord and one to be chosen by the Tenant.

The Tenant exercised its Purchase Option, and each of the Tenant and the Landlord obtained independent appraisals of the two commercial properties. The Landlord's appraiser valued the properties at $31,200,000 and the Tenant's appraiser valued the properties at $11,746,000. Under the leases, the sale price should have been $21,473,000, the average of the two appraisals.

The parties each disputed the other's appraisal. However, the Landlord eventually circulated draft closing documents with the purchase price listed at the midpoint of the two appraisals. The Tenant signed the closing documents and wired $11,746,000 (their appraised value) to the Landlord's solicitor. The Landlord responded that the funds provided were not compliant with the Agreement and requested that the Tenant send the remaining balance of funds.

The Tenant then placed the disputed balance in a trust, pending legal resolution. Upon learning this, the Landlord returned the $11,746,000 to the Tenant and refused to transfer title to the two commercial properties. The Landlord later received a third-party offer of $27.5 million for the properties. Meanwhile, the Tenant sought the court-ordered remedy of specific performance at a purchase price of $11,746,000. The Landlord applied for a declaration that the Tenant failed to exercise the Purchase Option correctly, rendering it null and void.

Lower Court Decision and Appeal

In the lower court decision, the trial judge ordered that the Landlord convey the two commercial properties in exchange for the midpoint value of the two parties' appraisals, $21,473,000. The trial judge agreed that the Tenant was justified in tendering the undisputed amount while holding the balance in trust until a legal resolution was reached.

The Landlord appealed the lower court decision, arguing that the trial judge had erred by not declaring the Purchase Option void due to the Tenant's breach thereof.

The Court of Appeal allowed the Landlord's appeal, ruling that once the Purchase Option was exercised, both parties were bound to complete the sale using the agreed-upon pricing method. The Tenant's act of withholding part of the payment with no legal authority and without the Landlord's consent, constituted a material breach of the Purchase Option. As a result, the Court of Appeal declared the Purchase Option null and void and granted the Landlord vacant possession of the two commercial properties for 12 months.

Conclusion and Key Takeaways

The mechanics of an option to purchase must be exercised in strict adherence. Even amid valuation disputes, parties cannot alter contractually agreed-upon procedures.

The authors gratefully acknowledge the assistance of Summer Student Isabelle Logan in the preparation of this update.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.