Court of Appeal Decision of the Week

“Open Contracts” & Implied Terms in Options to Purchase

Case: 101060873 Saskatchewan Ltd. v Saskatoon Open Door Society Inc., 2016 SKCA 98 (CanLII)

Keywords: Real Estate; Option to Purchase Real Property; “Open Contracts”; Implied Terms

Synopsis:

Saskatchewan Open Door Society Inc. (the Respondent) enters into a ten-year lease with Ms. Heinze, the owner of commercial real estate in the City of Saskatoon. The lease contains the following option to purchase:

It is hereby agreed by the parties hereto that, provided the Tenant is not in arrears or default of any of the covenants required on the part of the Tenant to be performed pursuant to the lease hereof, then the Landlord will grant the Tenant a one-time Option to Purchase the Building at the end of the 10th year of the lease term for a purchase price of One Hundred Thousand Dollars ($100,000).

The Respondent takes possession of the property in 2004, with the term of the lease to expire on January 14, 2014. The property is sold in 2005 to the Appellant, 101060873 Saskatchewan Ltd. (owned and controlled by Ms. Heinze’s daughter), for $170,000. The Respondent’s lease and option to purchase are assigned to the Appellant. At the time the option was entered into, there are three mortgages registered against the property with a total face value of $1.95 million.

The Respondent provides notice of its intention to exercise the option to purchase. In response, the Appellant commences legal action requesting a declaration the option is void for uncertainty (it does not indicate whether the Respondent is to assume the mortgages or receive the property free and clear of encumbrances). The Respondent defends the action; counterclaims for a declaration the option is enforceable and for an order of specific performance.

The Chambers Judge concludes there is an implied term in the option; requires the Appellant to convey title free and clear of the mortgages. The Court adopts the concept of “open contracts”; and in “accordance with that concept, a contract for the sale of land is complete if the parties, the property, and the price are agreed upon” (para. 11, C.A. Judgment). As per this concept, other terms (such as whether the land is to be transferred free and clear of all encumbrances) may be implied by law.

The Appellant raises the following grounds for appeal:

  1. Did the Chambers Judge make any errors of fact?
  2. Did the Chambers Judge err in finding a valid option to purchase?

The Court of Appeal upholds the option agreement and dismisses the Appellant’s appeal.

Importance:

The central question on this appeal was whether an option to purchase real property (identifying the parties, property, and the price) but making no explicit references to the mortgages, is void for uncertainty. For the Court of Appeal, the answer to this question involved determining what is “implied” when real property is sold (see para. 1).

For the Court of Appeal the result is the same (meaning there is a valid option to purchase) whether one applies the “open contracts” line of authority (Ulmer v Ulmer (1979), 1979 CanLII 2367 (SK QB), 5 Sask R 3 (QB) and Terlyn Industries Ltd. v Braukmann Building Corp., [1991] OJ No 1164 (QL) (Ont Ct J)) or the “more modern approach” as set out by the Supreme Court of Canada in Canadian Pacific Hotels Ltd. v Bank of Montreal, 1987 CanLII 55 (SCC), [1987] 1 SCR 711, and M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., 1999 CanLII 677 (SCC), [1999] 1 SCR 619.

As the Court explained, there is no magic to “open contract”. It simply means that, in addition to the three essential terms for the sale of land as per McKenzie v Walsh (1920), 1920 CanLII 72 (SCC), 61 SCR 312, a Court may be able to imply any other essential terms otherwise the contract will fail (see para. 34). Where the Court cannot do so, the contract will fail.

For the Court of Appeal, an agreement for the sale of land includes an implied term the purchaser is entitled to receive title free from mortgage encumbrances. If the vendor intends otherwise, they must say so:

In my view, agreements for the sale of land include an implied term that the purchaser will receive a “good and marketable title in fee simple” based on both conveyancing practice (custom) and as a “legal incident” of such contracts – that is by implication of law based on the judicial authorities cited herein (see para. 50).

The Court also found the “Torrens system” will not operate as a shield to protect a vendor from his or her contractual obligations in this regard (see para. 48).

To support its finding there was an implied term in this case, the Court stated it was “incongruous” for Ms. Heinze to have intended the Respondent assume some or all of the mortgage debt considering she never raised the topic with the Respondent (see para. 51).

It was also “difficult” for the Court to “imagine” the Respondent would agree to assume the mortgages in question (their face value was $1.95 million, more than five times the suggested market value of the property). Consequently, the Court found the Chambers Judge did not err in finding the option was binding and that the Appellant must provide good and marketable title in fee simple.

Counsel for the Appellant: Robert Kennedy, Q.C. (McDougall Gauley LLP, Saskatoon)

Counsel for the Respondent: Andrew Mason (Scott Phelps & Mason, Saskatoon)

Discuss on CanLii Connects

Posted: Wednesday, August 24, 2016