Tag Archives: real estate

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How Not to Exercise an Option to Purchase Land

The recent Court of Appeal decision in 1785192 Ontario Inc. and 1043303 Ontario Ltd. v. Ontario H Limited Partnership provides useful guidance on the rules around the exercise of options to purchase land where the price to be paid is to be set in accordance with appraisal evidence.

In this case, a tenant under a pair of commercial leases wished to purchase the properties that it occupied.  Each lease contained an option to purchase which provided that the purchase price would be the midpoint of appraisals to be obtained by each party. 

The parties each obtained an appraisal.  They were far apart.  The tenant’s appraiser suggested a value of $11,746,000.  The landlord’s appraiser put the value at $31,200,000. The midpoint, therefore, was $21,473,000.

Both parties used reputable appraisers.  This gives rise to the question as to how two reputable appraisers could possibly be so far apart in valuing a commercial property.  As is typically the case, the difference was caused mostly by a difference in assumptions.  The landlord’s appraiser assumed that the highest and best use of the properties would involve having them re-zoned for the development of a residential condominium complex.  The tenant’s appraiser assumed that its highest best use should reflect the current zoning, which was for commercial use.

Perhaps needless to say, both sides accused the other of putting forward appraisals which either artificially devalued or overvalued the properties for the advantage of their respective clients.

In any event, the option to purchase clause in each lease was clear in specifying that the price would be the average of the two appraisals.

The landlord took the position that its appraiser was correct. However, for closing, the landlord ultimately agreed to accept the average amount of about $21,000,000.

The tenant was more obstinate.  After insisting that its appraisal was accurate, it tendered the amount specified by its appraiser but paid over to its lawyer in trust the difference between that amount and the mid-point amount, to be held in trust pending the outcome of future litigation.

The landlord refused to convey title on that basis and had the $11,746,000 that had been tendered by the tenant returned to the tenant’s solicitor. 

The tenant brought an application to the court for an Order requiring the landlord to close at a price of $11,746,000. 

The judge hearing the application concluded that it would have been understood in the lease that each party can seek an appraisal using reasonable assumptions most favourable to that party and that this is what had happened.  As both parties obtained a compliant appraisal, the purchase price was the midpoint between the two.  However, as to whether the tenant had properly tendered at closing, the judge accepted the tenant’s argument that given the dispute about the purchase price the tenant was justified in tendering the undisputed amount while placing the disputed balance with a reputable stakeholder pending a court decision.  Accordingly, the judge required the landlord to convey the property in exchange for the midpoint amount, to be made up of the funds originally tendered by the tenant together with the additional amount held by the tenant’s solicitor in trust.

Note that this would have meant that the landlord would be paid the total amount which it had been prepared to accept before the start of the litigation, namely the midpoint amount.

By this point, however, and for reasons not set out in the initial decision or the subsequent decision of the Court of Appeal, this was no longer satisfactory to the landlord.  The landlord appealed the application judge’s decision to the Court of Appeal on the basis that the tenant had defaulted by tendering only part of the purchase price while sending the balance over to its own lawyer to be held in trust.  The tenant cross-appealed on the basis that the application judge had made a mistake in concluding that the landlord’s appraisal was valid.  The tenant argued that the dramatic difference between the two valuations was not within the realm of reasonable disagreement and one of them had to have been a product of a methodological error.  As the landlord’s appraiser had allegedly incorporated “speculative assumptions”, it was not valid and therefore the only valid appraisal before the court was that of the tenant. 

The Court of Appeal first concluded that there has been no error made by the application judge in dealing with the appraisals.  Whether or not an appraisal is valid is a question of fact and, the judge having decided that they were valid without making any obvious error in the process, that decision had to be respected.

However, the Court of Appeal ruled that the judge had been wrong in finding the tenant’s partial tender of funds to be adequate.  On the contrary, the Court of Appeal decided that this had been a breach of the tenant’s obligation to tender an amount equal to the midpoint of the two valuations.  This was the methodology specified in the option clauses and the parties had a legal obligation to close the transaction on those terms. 

There are cases in which a partial tender may be satisfactory but those are generally restricted to circumstances in which a purchaser wants to close the purchase of a property with an abatement.  In some of those cases, it may be possible to tender the amount which the purchaser feels is appropriate while paying the amount of the claimed abatement into court or in escrow. 

That approach is not appropriate in a case in which a closing is taking place pursuant to an option to purchase.  Options must be exercised strictly and the tenant, not having tendered exactly as required by the option, was in default and therefore no longer entitled to close on any basis.  As the court indicated, the tenant should have tendered the purchase price properly and litigated about it afterwards. 

In my view, the entire issue goes back to the wording in the option clause.  We now know without question that options are going to be enforced strictly in accordance with their wording.  While the wording with this option might seem sensible on its face, this case illustrates how such wording can lead to an unexpected result given that appraisals by their very nature, can lead to very different results depending on assumptions made by the appraisers.  Perhaps the best lesson to be learned from this case has to do with the importance of drafting option clauses of this nature in such a way as to try to limit the possible range of outcomes.

The New World of Summary Judgments: Are the Courts Going Too Far?

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The recent case of King Lofts Toronto I Ltd. vs. Emmons involves the granting of a summary judgment where the remedy would never have been possible in the past.

This was a solicitor’s negligence case in which the law firm moved for summary judgment dismissing the claim and, without formally bringing a cross-motion for summary judgment, the former client requested a partial summary judgment against the law firm.

In 2005, a developer retained the Defendant law firm to act on a purchase of four commercial properties in downtown Toronto. The price was $22.5 million. The title indicated that the City of Toronto owned a strip of land and a laneway under the rear of one of the buildings.

The purchaser assigned its interest in the purchase agreement to the Plaintiff in this case, whose principal was described by the Court as an experienced businessman and investor in real estate. The Plaintiff retained the law firm to continue and to complete the transaction.

Before closing, the lawyer handling the file told the Plaintiff about the laneway. He also said that this was a minor issue that was covered by title insurance that was being obtained. He indicated that the problem would be solved by converting the property from the Registry System to the Land Title System, that this could be completed after closing, and that the cost of doing so would be relatively nominal. Subsequently, the law firm indicated that after closing they could approach the City and ask for a by-law to be passed to convey the lane to the Plaintiff. Alternatively, they could attempt to obtain a court order based on the length of time that the building had been located on the laneway itself.

In any event, it was clearly conveyed to the Plaintiff that the problem was a minor one and likely covered by title insurance.

What the Plaintiff was not told is that the City would request payment for a conveyance of the laneway even though it had been located under a building for about eighty-six years. He was also not told that the title insurance policy excluded coverage for City-owned laneways.

The deal closed with no holdback in respect of the laneway. After the closing, the Plaintiff did nothing about the laneway and several years passed.

In 2008, the Plaintiff received an unsolicited offer from a Real Estate Investment Trust to purchase the properties. An agreement was signed for the sale to the REIT for a purchase price of $31.5 million.

Before the closing of that transaction, the lawyer for the REIT demanded that the title be rectified so that the Plaintiff could convey the laneway. When the Plaintiff looked into it further, it discovered that it would cost $106,000 to get the City to convey the laneway. An application was made to the title insurance company for coverage but that was denied.

The Plaintiff had no choice but to pay the $106,000 for the laneway. It then closed the deal to sell the properties to the REIT for $31.5 million – $9 million more than it had paid four years earlier.

The Plaintiff then sued the law firm for negligence.

At this point, one might well take a step back and suggest that having achieved a profit of almost 50%, the Plaintiff might have better things to do than to chase its former law firm over $106,000. It may be the fact that the law firm had billed the Plaintiff more than $270,000.00 in fees for the purchase transaction, which the Plaintiff had apparently found excessive, played a role in the Plaintiff’s decision to pursue the matter.

In any event, the law firm brought a motion for judgment to dismiss the claim on a variety of grounds. The most interesting one, in my view, related to the issue of causation.

As the Court pointed out, for a lawyer to be liable for professional negligence, the client must prove that the misconduct caused the client’s loss and that the client has suffered damages as a result. Generally, the “but for” test is used, on a balance of probabilities. In other words, the client must show that the injury would have not occurred “but for” the negligence of the lawyer.

In this case, the Plaintiff argued that had he been made aware of the extent of the problem, and the cost of resolving it, he would have insisted on a reduction in the purchase price.

By way of contrary evidence, the original purchaser of the property (who had assigned the purchase agreement to the Plaintiff) provided evidence that the vendor was notoriously hard to deal with and would never have agreed to such a reduction.

If that is true, of course, it could be argued that the law firm actually did the Plaintiff a tremendous favour. If the Plaintiff had been told of the extent of the problem and asked for the reduction, and the vendor had refused, it is very possible that the Plaintiff would have lost the deal (and therefore, the handsome profit achieved upon resale four years later).

As a reflection of the current state of the law on summary judgments, however, what is particularly interesting is what the Judge did with this evidence.

The Judge simply accepted the Plaintiff’s evidence and disregarded the evidence of the original purchaser. He decided that it was “at least doubtful that the vendor…could have simply relied on the recession clause to withdraw from the transaction” and concluded on a balance of probabilities that likely, there would have been agreement between the parties on a holdback or an abatement of the purchase price.

The Judge went on to dismiss the law firm’s motion for summary judgment and to grant summary judgment in favour of the Plaintiff on liability, with a trial to follow on damages.

In my view, this is a surprising decision that may move the yardsticks for summary judgment a long way. The current jurisprudence does allow the judges to make some credibility findings in certain circumstances. Here there was a contest between written evidence from the Plaintiff as to what he would have done (with the benefit of hindsight) on the one hand, and written evidence from another individual with nothing to gain or lose in the transaction suggesting that what the Plaintiff would have done would not have worked. I would have thought that this would have required a trial in order to resolve. However, that was not this motion court Judge’s opinion.

Subject to review by the Court of Appeal, this case might well constitute a significant development in the law of summary judgment in Ontario.