



COURT OF APPEAL FOR ONTARIO

CITATION: 2123201 Ontario Inc. v. Israel Estate, 2016 ONCA
    409

DATE: 20160527

DOCKET: C60033

Laskin, Pardu and Roberts JJ.A.

BETWEEN

2123201 Ontario Inc.

Applicant (Appellant)

and

The Estate of Harold Israel by his Estate
    Trustee, Ken Israel

Respondent (Respondent)

Randell K. Thomson, for the appellant

Steven W. Pettipiere, for the respondent

Heard: November 27, 2015

On appeal from the judgment of Justice Patrick J. Flynn
    of the Superior Court of Justice, dated January 23, 2015, with reasons reported
    at 2015 ONSC 538, [2015] O.J. No. 369.

Laskin
    J.A.:


A.

Introduction

[1]

A sells land to B. At the same time, A and B enter into an agreement
    that A can repurchase the land if a condition under Bs control is met. Does
    the agreement give A an interest in the land, or only a personal contractual
    right? This appeal turns on the answer to that question.

[2]

In 1931, Harold Israel conveyed land he owned in Waterloo County to two
    individuals, D.M. Bowman and Seranus Martin. The land contained a gravel pit,
    and the purchasers bought the land to obtain the gravel, sand, and stone on it
    (collectively the gravel). Contemporaneously with the conveyance, the parties
    signed an Agreement giving Israel the first option to purchase the land for
    $1 once the gravel has been removed from it. But the Agreement gave Bowman and
    Martin the discretion and authority to state when all the gravel had been
    removed.

[3]

The appellant, 2123201 Ontario Inc., is the current owner of the land
    and continues to extract gravel from it. Harold Israel died in 1980, and his
    rights under the Agreement have passed to his Estate, the respondent in this appeal.
    The Estate has registered two notices of claim against the land and in May 2009
    demanded that the land be conveyed to it for $1.

[4]

2123201 then brought an application for an order declaring the Agreement
    void and deleting it from title. The resolution of the application turned on
    how to characterize Israels first option to purchase under the Agreement.

[5]

2123201 contended that the Agreement was an option agreement, which gave
    Israel an immediate, equitable interest in the land. Because his interest in the
    land had not vested, the Agreement was void and unenforceable under the rule
    against perpetuities.

[6]

The Estate contended that the Agreement gave Israel a right of first
    refusal, which was not an interest in land, but was merely a personal right. As
    the Agreement did not give Israel an interest in land, the rule against
    perpetuities did not apply and the Estate may still enforce Israels first option
    to purchase under the Agreement.

[7]

The application judge dismissed 2123201s application. He held that the
    Agreement was not an option agreement that created an interest in land. It was,
    instead, something akin to a right of first refusal  which does not create
    any interest in land.

[8]

On appeal, each party renews the position it took before the application
    judge. For the reasons that follow, I would allow the appeal.

B.

Did the Agreement Give Israel an Interest
    in the Land?

(1)

Ownership of
    the Land

[9]

I will summarize briefly the history of the ownership of the land.

·

1931: Harold Israel conveys the land to Bowman and Martin.

·

1950: A small part of the land is transferred to the County of
    Waterloo Public School Board to expand its school property. Harold Israel
    together with Bowman and Martin are the named grantors on the deed transferring
    the land to the school board.

·

1965: The land is sold to William Sittler and immediately
    transferred for no consideration to his solicitor, Robert Sutherland.

·

2002: The land is transferred into the Land Titles system.

·

2004: The land is transferred from Sutherland to 3239501 Canada
    Ltd., a company controlled by William Sittler, for $75,000.

·

2009: The land is transferred to Sittler Excavating Limited, and
    in turn to the appellant 2123201 Ontario Inc., for $325,000. 2123201 is
    operated by Rick Sittler.

[10]

This brief history shows that the Sittler family has owned the land for over
    50 years. Although the application judge expressed some concern about whether
    2123201 is the current owner, the Estate conceded that it is. Ownership of the
    land is not in issue on this appeal.

(2)

The 1931
    Agreement

[11]

On the same day Israel conveyed the land to Bowman and Martin  January
    7, 1931  the parties entered into the Agreement, which is the subject of this
    appeal. The Agreement recites that Bowman and Martin purchased the land solely
    to acquire the gravel, sand and stone etc., thereon. The Agreement then
    contains seven paragraphs said to be conditions agreed on by the parties. On
    this appeal, the important paragraphs are 1, 4 and 6.

[12]

Paragraph 1 gives Israel the first option to purchase the land once
    the gravel has been removed, and gives Bowman and Martin the discretion to
    state when that has occurred.

The parties hereto of the First Part [Bowman and Martin] hereby
    in consideration of the sum of One Dollar now paid to them by the party of the
    Second Part [Israel], the receipt whereof is hereby by them acknowledged, the
    said parties of the First Part give to the party of the Second Part, the first
    option to purchase the said lands at the sum of One Dollar which option is
    exercisable when the gravel, sand and stone, etc., are removed from the said
    lands. It is at the discretion and within the authority of the Parties of the
    First Part to state the time that the gravel, sand, and stone, etc., are removed
    and the said option exercisable.

[13]

Under paragraph 4, Bowman and Martin are not required to remove the
    gravel by any fixed date. They may remove it at their own pleasure, but may
    not excavate below the level of the road adjoining the land.

It is understood that the parties of the First Part have
    purchased the lands to acquire the property in the gravel, sand and stone,
    etc., thereon. They may remove the gravel, sand and stone, etc. at their own
    pleasure and there is no stated or agreed time within which the said gravel,
    sand and stone, etc., must be removed. They covenant and agree with the party
    of the Second Part that they will leave the surface of the property reasonably
    level when the gravel, sand and stone, etc., have been removed and that no excavation
    within the boundaries of the said lands will be at a lower level than the
    travelled surface of the roadway of highway at its lowest point adjoining the
    property.

[14]

Under paragraph 6, Israel agrees to execute any quitclaim deed needed
    for widening or altering the adjoining road.

The Party of the Second Part agrees to execute when requested
    and for a consideration of One Dollar, a quit claim deed of a part of the said
    lands required in the near future for widening, improving or altering the
    course of the road now adjoining the property.

[15]

In 1974, Harold Israel registered an assignment on the title to the
    land, in which he assigned to himself, his heirs, executors, and administrators
    his rights under the Agreement. Because of this assignment, his Estate may now
    assert whatever rights Israel had under the Agreement. Then, in 1987, and again
    in 1997, the Estate registered a notice of claim under the Agreement on the
    title to the land.

(3)

Options to
    Purchase and Rights of First Refusal

[16]

This appeal raises one issue: when the Agreement was made, did it give
    Israel an interest in the land? 2123201 says that the Agreement gave Israel an
    option to purchase  or perhaps more accurately, an option to repurchase 
    which created an immediate interest in the land. The Estate says that the
    Agreement gave Israel only a right of first refusal, a personal right, which
    did not create any immediate interest in the land.

[17]

Both parties agree that if the Agreement did give Israel an immediate
    interest in the land, then the Agreement is void and unenforceable because it
    offends the rule against perpetuities. The parties also agree that if the
    Agreement merely gave Israel a personal contractual right and not an interest
    in the land, then the Estate may still enforce its rights under the Agreement.

[18]

The difference between options to purchase and rights of first refusal has
    been discussed extensively in the jurisprudence of the Supreme Court of Canada
    and this court, although the jurisprudence has been the subject of some
    criticism: see
Irving Industries (Irving Wire Products Division) Ltd. v.
    Canadian Long Island Petroleums Ltd.
, [1975] 2 S.C.R. 715;
McFarland
    v. Hauser
, [1979] 1 S.C.R. 337;
Metropolitan Homes Ltd. v. Politzer
,
    [1976] 1 S.C.R. 363;
Benzie v. Kunin
, 2012 ONCA 766, 112 O.R. (3d) 481;
    and
Harris v. McNeely
(2000)
,
    47 O.R. (3d) 361. For a critique of the early jurisprudence, see the excellent
    article by Paul Perell (now Perell J. of the Ontario Superior Court of Justice):
    Options, Rights of Repurchase and Rights of First Refusal as Contracts and as
    Interests in Land, (1991) 70 Can. Bar Review 1, at pp. 17-27.

(a)

Options to
    Purchase

[19]

An option to purchase gives the option holder the right but not the
    obligation to purchase land. In
Canadian Long Island Petroleums
, Martland J. succinctly defined an option to
    purchase and emphasized the option holders control over the exercise of the option.
    In his words at p. 732
: the essence of an option to purchase is
    that, forthwith upon the granting of the option, the optionee upon the
    occurrence of certain events solely within his control can compel a conveyance
    of the property to him. An option holder has an equitable interest in the
    land, contingent on the holders election to exercise the option. Because an
    option to purchase creates an interest in land, it is specifically enforceable
    at the time the option is granted. But to remain valid the option must be
    exercised within the perpetuity period.

[20]

The perpetuity period is not later than twenty-one years after some
    life in being at the creation of the interest: see, for example,
Sutherland
    Estate v. Dyer
(1991)
, 4
    O.R. (3d) 168 (Gen. Div.), at p. 171. An interest that vests outside this
    period is void. As Killeen J. explained in
Sutherland Estate
, at p. 172
, the rule against
    perpetuities is a rule invalidating interests that vest too remotely. And it is
    a rule that applies not just to owners of land, but also to holders of
    contingent interests, such as options to purchase.

It is stating the obvious to say that the central purpose of
    the rule was to prevent owners of property from exercising control over their
    property for too long a time after they ceased to be owners. However, the rule
    does not implement this purpose by restricting the duration of interests in
    trusts or other interest in property. Rather, the rule restricts the length of
    the interval which may elapse between the creation of a contingent interest and
    the vesting of that interest. Thus, the rule applies only to contingent
    interests and, to that extent, it has been said by many commentators that the
    rule should be really characterized as a rule against remoteness of vesting.

[21]

In the present case, the perpetuity period ended in 1952 (21 years after
    the Agreement was signed) or 2001 (21 years after Harold Israel died). It is
    unnecessary to decide which date is appropriate. If the Agreement is an option
    to purchase, which creates an interest in land, that interest still has not
    vested; therefore even if 2001 is the appropriate date, the option to purchase
    is void.
[1]

(b)

Rights of First
    Refusal

[22]

A right of first refusal is a commitment by the owner of land to give
    the holder of the right the first chance to buy the land should the owner
    decide to sell. Typically, where a land owner is prepared to accept an offer to
    purchase from a third party, the holder of the right of first refusal will be
    given an opportunity to match the offer; or, when an owner of land decides to
    sell and fixes the sale price, the holder of the right of first refusal will be
    given the first chance to buy at the fixed price. In these typical right of
    first refusal scenarios, the owner has an unfettered discretion whether to sell
    and when to sell.

[23]

Importantly, the right of first refusal is a personal right. It does not
    create an immediate interest in land:
Canadian Long Island Petroleums
, at
    p. 735. Thus, it is not immediately enforceable by an action for specific
    performance. If, however, an owner of land receives an offer to purchase that
    it is prepared to accept, then the right of first refusal is converted into an
    option to purchase. At that point, the holder of the right of first refusal has
    an interest in the land, which can be specifically enforced:
Harris
, at
    para. 12.

(c)

Summary

[24]

As the discussion above shows, the jurisprudence establishes that
    options to purchase create immediate interests in land; rights of first refusal
    do not. Options to purchase are specifically enforceable; rights of first
    refusal are not. And options to purchase are subject to the rule against
    perpetuities; rights of first refusal are not. Finally, according to
Canadian
    Long Island Petroleums
, options to purchase give the option holder control
    over the decision to effect a conveyance. Rights of first refusal give the land
    owner control over the decision to convey. But, as I will discuss, other case
    law shows that in some circumstances control over the exercise of the option is
    not determinative.

(4)

Analysis

[25]

The first option to purchase the land given to Harold Israel under the
    1931 Agreement does not fit precisely into either the definition of an option
    to purchase or the definition of a right of first refusal established in the
    jurisprudence.

[26]

It is not precisely a simple option to purchase or repurchase as defined
    in
Canadian Long Island Petroleums
because the event triggering the
    ability to exercise the option  the removal of all the gravel from the land 
    is not within the control of the holder of the option, now Israels Estate. Thus
    the Estate cannot immediately exercise its option. Its ability to do so depends
    on 2123201s determination that the gravel has been removed.
[2]


[27]

And Israels first option to purchase the land is not precisely a
    simple right of first refusal. No third party is involved, and more
    importantly, 2123201 does not have an unfettered discretion to decide if and
    when it will sell the land. It must offer to sell the land to the Estate when
    all the gravel is removed. Although 2123201 may remove the gravel at any pace
    it chooses and has the discretion to decide when all of it has been removed,
    that discretion is not open-ended. It must be exercised reasonably.

[28]

That a discretion given to a contracting party must be exercised
    reasonably is clear from the authorities. For example, in
Nareerux Import
    Co. Ltd. v. Canadian Imperial Bank of Commerce
, 2009 ONCA 764,
97 O.R. (3d) 481,
at para. 71, Blair J.A. wrote:

Contracts in which performance is dependent upon the exercise
    of discretion on the part of one of the parties are contracts that are
    particularly characterized by the implied duty of good faith
    performance. In such circumstances, the discretion must be exercised
    reasonably and in good faith. [Citations omitted.]

[29]

Professor John McCamus makes the same point in his text, The Law of
    Contracts (Toronto: Irwin Law, 2012), at p. 849 and 865-6:

In sum, these cases establish the proposition that where
    discretionary powers are conferred by agreement, it is implicitly understood
    that the powers are to be exercised reasonably.



In the control of contractual discretion cases, for example, it
    may be more realistic to suggest that the implied limitation on the exercise of
    the discretion is intended to give effect to the reasonable expectations of
    the parties.

[30]

The application judge recognized that Israels option did not fit
    exactly into the definition of a right of first refusal. He characterized it as
    akin to a right of first refusal. But he concluded that the option was not
    really an option to purchase because Israel did not control the exercise of the
    option, and thus could not specifically enforce it at the time the Agreement
    was made.

[31]

I take a different view. Israels and now the Estates inability to
    control the exercise of the option is not, in this case, decisive. Instead, I
    focus on what the parties intended by their Agreement. In my opinion, the true
    intent of the parties was to give Israel an interest in the land at the time
    the Agreement was made.

(a) Control

[32]

Israels lack of control over the exercise of his option figured
    prominently in the parties submissions. The Estate, relying on Martland J.s
    definition of an option to purchase in
Canadian Long Island Petroleums
,
    submits that Israel had only a personal right to repurchase the land. 2123201,
    on the other hand, submits that control is not determinative and, even in its
    absence, Israel still had an equitable interest in the land. I agree with
    2123201s submission.

[33]

The case law in the Supreme Court of Canada on the relevance of control
    has not been uniform. And this court has said that control over the exercise of
    an option does not always resolve whether the option gives rise to an interest
    in land:
Jain v. Nepean
(1992), 9 O.R. (3d) 11 (C.A.), leave to appeal
    refused, [1992] S.C.C.A. 473.

[34]

Canadian Long Island Petroleums
makes no mention of two earlier
    Supreme Court of Canada decisions 
City of Halifax v. Vaughan Construction
    Co. Ltd.
, [1961] S.C.R. 715, and
Weinblatt v. City of Kitchener
,
    [1969] S.C.R. 157  each of which reached a different conclusion. In both those
    cases, a city sold land to a developer but retained an option to demand a reconveyance
    should the developer not build within a specified time. In other words, the
    citys right to demand a reconveyance, like Israels option to purchase, was
    not within the citys control. It depended on the developers decision whether
    or not to build. Yet in both cases the Supreme Court of Canada concluded that
    the covenant to demand a reconveyance gave the City an equitable interest in
    the land.

[35]

Then, in
Jain
, this court considered the issue afresh in the
    light of the Supreme Courts jurisprudence. In
Jain
, as in
Vaughan
and
Weinblatt
, the City of Nepean sold property to a developer under
    an agreement that gave it the right to repurchase the property if the developer
    did not construct a building of a specified minimum size within a specified
    time. This court had to decide whether the agreement gave Nepean an interest in
    the property or merely a personal right of first refusal. This court held that
    the agreement gave Nepean an interest in the property.

[36]

Carthy J.A., writing for the panel, pointed to the apparent
    inconsistencies in the reasoning of the courts in
Vaughan
,
Weinblatt
,
and
Canadian Long Island Petroleums
.
    And he noted that the latter case did not refer to the two earlier cases. He
    followed
Vaughan
and
Weinblatt
and concluded, at p. 19, that
    control was not determinative:

A person who acquires property with notice of a third party's
    right of purchase in the event of failure to construct a building takes subject
    to that option. Control of the exercise of the option is not a factor.

[37]

In both
Jain
and the case before us, the right to repurchase
    was not within the control of the holder of the right. In
Jain
, Carthy
    J.A. concluded that control was not decisive. By their agreement, the parties
    still intended that Nepean maintain an interest in the land. Similarly, in the
    appeal before us, control over the exercise of the option does not resolve
    whether the Agreement gave Israel an immediate interest in the land. That issue
    can only be resolved by looking at what the parties intended.

(b) The Intent of the Parties

[38]

Instead of focusing on the question of control, I view the issue as one
    of contract interpretation: to determine the true intent of the parties at the
    time the Agreement was made. In my opinion, the purpose of the Agreement, the
    context in which it was made, its terms, and the conduct of the parties under
    it, show an intention to give Israel an option to repurchase the land, which gave
    rise to an immediate, equitable interest in the land.

[39]

Bowman and Martin bought the land from Israel for one purpose only: to
    extract the gravel from it. They had no other interest in the land. Once the
    gravel was removed, Israel could have his land back for $1. The purpose of the
    Agreement and the underlying context in which it was made suggest Israel was
    being given not a mere personal right of first refusal but an option to
    repurchase, which created an immediate interest in the land.

[40]

The terms of the Agreement bolster this conclusion. In paragraph 1 of
    the Agreement, Israels right is termed a first option to purchase, not a
    right of first refusal. Although the label by itself is not determinative,
    paragraph 6 also shows that the parties intended that Israel have an immediate
    interest in the land. Under that paragraph, Israel agreed to execute a
    quitclaim if part of the land was needed to widen or alter the road adjoining
    the land. If all Israel had was a right of first refusal, he would not have had
    to quitclaim anything. But if he had an equitable interest in the land created
    by an option to purchase, he would have had to give a quitclaim.

[41]

Any doubt, however, about the parties intention when they signed the
    Agreement has been resolved by how the parties have acted under the Agreement.
    The way parties act under an Agreement may be helpful in determining its
    intended meaning when there is doubt about the appropriate interpretation. The
    parties later conduct may show what meaning they gave to the Agreement after
    it was made, which in turn may show the parties intent when the Agreement was
    made:
Montreal Trust Co. of Canada v. Birmingham Lodge Ltd.
(1995), 24
    O.R. (3d) 97 (C.A.), at p. 108.

[42]

Here, the parties later conduct shows that they viewed the Agreement as
    creating an immediate interest in land. In 1950, when a portion of the land was
    conveyed to the school board, Israel joined Bowman and Martin in the deed as a
    grantor. He would not have had to do so if he only had a personal contractual
    right of first refusal.

[43]

The purpose of the Agreement and the context in which it was made, its
    terms, and the later conduct of the parties under the Agreement, together show
    that the intent of the Agreement was to give Israel an immediate, equitable
    interest in the land. The interest was contingent on the exercise of the option
    to purchase. As the option has not been exercised, the interest has not vested
    within the perpetuity period and is now void.

[44]

My view of the parties rights under the Agreement differs from that of
    the application judge. Since the Supreme Court of Canadas decision in
Sattva
    Capital Corp. v. Creston Moly Corp.
, 2014 SCC 53, [2014] 2 S.C.R. 633, ordinarily
    a trial or application judges interpretation of an agreement is entitled to
    deference from an appellate court. Here, I doubt deference is warranted. The
    application judge did not interpret the Agreement. He looked only at the
    question of control over the exercise of the option. But even if deference is
    warranted, this court is entitled to intervene. The application judges
    conclusion that Israel had only something akin to a right of first refusal was
    an unreasonable conclusion, justifying appellate intervention.

C.

Conclusion

[45]

I would allow the appeal, set aside the judgment of the application
    judge, and in its place grant the relief sought by 2123201 Ontario Inc.,
    together with costs in the agreed on amount of $15,000 inclusive of
    disbursements and applicable taxes. 2123201 Ontario Inc. is also entitled to
    the costs of the application in the amount ordered by the application judge,
    $15,000.

Released: May 27, 2016 (J.L.)

John Laskin J.A.

I agree. G. Pardu J.A.

I agree. L.B. Roberts J.A.





[1]
It is void both at common law and under the
Perpetuities Act
, R.S.O. 1990, c. P .9.
    Section 4 of the Act prescribes that every contingent interest is presumptively
    valid, and establishes a wait and see rule. Even under this rule, Israels option
    to purchase would be void, as it did not vest within the perpetuity period.



[2]
Perell terms rights of repurchase accompanying a sale of land, but dependent on
    the decision of the owner of the land, a complex right of repurchase: at p. 7.


