OPTION TO PURCHASE CLAUSE IN COMMERCIAL LEASE

It is well known that a tenant of a commercial lease can register the lease at the land registry office to make it enforceable against a subsequent acquirer of the property. For example, if a lease is not registered, a developer who acquires the property can cancel the lease after 12 months by giving at least 6 months prior notice, even if the lease is for a much longer term. If the lease is registered, the subsequent acquirer must respect it.

However, an interesting legal issue arises when the lease contains an option to purchase clause in favour of the tenant. Does registration of the lease make the option to purchase enforceable against third persons together with the other terms of the lease? This issue was the object of a judgment rendered by the Superior Court on 2018-02-16. (Procureur Général du Canada -vs- 555 Carrière Inc. et al., 2018 QCCS 565)

Summary of the Facts

The property includes an office building that was built in 1983 and 1985 consisting of 6 stories for offices. Bourque, the original owner, entered into a lease with the Government of Canada ("GOC") for a term commencing 1985-06-01. The parties renewed the lease for a 25year term commencing 1991-09-30 and terminating on 2016-07-31. The lease included an option to purchase for $15 million and was registered at the land registry office.

On 1991-10-01, Bourque hypothec's the property in favour of TBN who registered a prior ("60 day") notice on 2002-01-10. After the expiry of the 60day legal delay, TBN instituted foreclosure proceedings to take the property in payment of its claim. GOC did not intervene in the case.

On 2007-11-26 TBN assigns and transfers its rights to the hypothecary claim to Computershare.

On 2009-12-21 the Court renders a judgment pursuant to the consent of the parties which granted the taking in payment suit and declared Computershare owner of the property retroactive to 2002-01-10. There was no appeal from the judgment, which was registered at the land registry office on 2010-01-25.

On 2010-04-06 GOC informs Computershare that it intends to exercise the option to purchase at the end of the lease. On 2010-04-15 Computershare replies through its attorneys that the option to purchase is not legally binding upon it.

On 2010-08-18, Computershare sells the property to Gestion 555 for $43,974,908.01 who charges the property with 3 hypothecs.

On 2011-08-04, Gestion 555 formally notifies GOC that it recognizes the validity of the lease but that it is not bound by the option to purchase.

GOC filed suit to declare the option to purchase valid and binding against Gestion 555. After the expiry of the lease, it also asked the Court to be declared the rightful owner of the property.

Reasoning of the Court

It is well established that rights resulting from a lease are personal i.e. not real rights which are rights in property. An option to purchase is a personal right that can be enforced against the person who granted it but does not confer any right in or to property itself. As such, a personal right such as an option to purchase or promise to sell is generally not subject to registration and therefore not enforceable against third parties who have not voluntarily assumed the obligation.

In the opinion of the Court, the lease and the unilateral promise to sell (i.e. the option to purchase) are two distinct contracts that are governed by their respective rules even if they co-exist in the same document. Personal rights, as opposed to property rights, can be enforced against the parties to the contract but not against third persons. The law creates an exception for leases by allowing them to be registered but according to the Court, this is an exception to the general rule and should be interpreted restrictively.  The Court went as far to say that it would make no difference to her interpretation of the law if the inclusion of the option to purchase was a fundamental consideration for the GOC to enter into the lease. According to the Court, the protection afforded by registration of the lease is limited to the essential terms and conditions of a lease namely, the description of the property, the amount of rent and the duration. 

An option to purchase is not a right resulting from a lease and therefore cannot be registered. The Court suggested that if GOC wished to protect its right, it could have done so by requiring a hypothec to be registered on the property to guarantee performance of the option to purchase.

The result could have been different for GOC had there been no taking in payment judgment. When a property is sold, the buyer generally assumes all of the seller's obligations pursuant to existing leases, which would have made the option to purchase enforceable against the new owner. Computershare's title based on the judgment contained no such obligation.