THE FLIP ARGUMENT

A commercial lease may include an option to purchase the building in favour of a tenant. Such clauses are generally personal to the tenant and non-transferable or assignable. When the option specifies a sales price, what is to prevent the tenant from purchasing the property and flipping it to a third party (who may be a competitor of the owner) for a profit? Would this contravene the option clause? The contestation of the exercise of the option clause is sometimes referred to as the flip argument, which was considered by the Quebec Court of Appeal (4207602 Canada Inc. -v- 9139-4882 Quebec Inc.et al., 2018 QCCA 1035).

The option clause in the lease reads as follows:

11. OPTION TO PURCHASE

Provided the LESSEE [(Cameo)] is not in default at any time, either before or after the exercise of the present Option, the LESSEE is hereby granted options to purchase the Leased Premises at the following prices, in all cases without any warranty whatsoever, legal or otherwise, to be exercised by written notice to be given on or prior to the following respective dates:

[…] 

The Leased Premises shall be sold to the LESSEE free and clear of all hypothecs. […] The LESSEE hereby acknowledges that it has been in occupation of the Leased Premises since 1992 and, consequently, has full and complete knowledge of the state and condition of the Leased Premises and of all matters or issues pertaining to such state and condition and hereby expressly represents to be fully satisfied therewith, except as herein expressly provided under the terms of clause 46 hereof.

This Option to Purchase is a personal right of the LESSEE and is neither transferable nor assignable, unless made to a related party, and shall be valid only provided LESSEE is not in default of any other term or condition of the Lease.

The trial judge rejected the claim of the tenant for transfer of title by maintaining the flip argument. More particularly, she found that the evidence showed that the tenant's intention was not to acquire the property for its own use and benefit but rather to flip for a profit which she found contravened the option clause. She consequently dismissed the claim of the tenant.

The Court of Appeal did not agree with the trial judge's reasoning and rejected the flip argument but maintained the conclusions of the judgment on other grounds.

The Court of Appeal cited Article 1212 of the Quebec Civil Code which provides that "A restriction on the exercise of the right to dispose of property may only be stipulated by gift or will". According to the terms of the Option, the tenant could not transfer or assign it to a third party, but it could nevertheless exercise the Option and do as it wished with the property once it became the owner. 

The landlord refused to transfer title to the tenant in February 2007 and the latter filed suit in November of the same year claiming damages calculated on the basis of the lost gain that would have resulted from the re-sale of the property. It was not until April 2011, almost 4 years later, that the tenant amended the court proceedings to request a judgment granting it title to the property. 

Contrary to the trial judge, the Court of Appeal found this delay to be unreasonable and a bar to the tenant's claim for transfer of title. Such a claim must be exercised within a "reasonable delay" from when the claim arose otherwise, it could give rise to great uncertainty. For example, the owner of the property would presumably have repairs or renovations to undertake and grant hypothecs on the property to secure financing, all of which would be put in risk during a lengthy period of title uncertainty.

The other issue upon which the Court of Appeal and the trial judge diverged concerned one of the essential conditions for a successful transfer of title claim: evidence that the claimant has the financial resources at all relevant times to pay the purchase price. Until the Court of Appeal decision of Houlachi v. Bray, 1997 CanLII 7108, the claimant was obligated to tender the full amount of the purchase price into court. This rule effectively limited the legal recourse to those who could pay the full price in cash. Since Houlachi,the rule was significantly tempered to require evidence that the claimant had the financial resources necessary to complete the transaction, such as a commitment from a financial institution to lend the funds. According to the Court of Appeal, such evidence was lacking and the claim for transfer of title had to fail on this ground as well.