In 1931, I. conveyed land containing a gravel pit to B. and M., who purchased the land solely to obtain the gravel. At the same time, the parties entered into an agreement giving I. the “first option to purchase” the land for $1.00 once the gravel had been removed. However, the agreement gave B. and M. the “discretion” and “authority” to state when that event had occurred. I. died in 1980, and his rights under the agreement passed to his estate. The applicant acquired the land in 2009. The applicant brought an application for an order declaring the agreement void and unenforceable under the rule against perpetuities. The application judge dismissed the application, holding that the agreement was not an option agreement that created an interest in land, but rather was akin to a right of first refusal, which does not create any interest in land. The applicant appealed.
Held, the appeal should be allowed.
The application judge erred in focusing on I.’s (and his estate’s) inability to control the exercise of the option. The focus should have been on what the parties intended by the agreement. The true intent of the parties was to give I. an option to repurchase the land, which gave rise to an immediate equitable interest in the land, rather than a right of first refusal. The parties’ conduct showed that they viewed the agreement as creating an immediate interest in land. In 1950, when a portion of the land was conveyed to a school board, I. joined B. and M. 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. As the option had not been exercised, the interest had not vested within the perpetuity period and was now void.
(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 holder’s control over the exercise of the option. In his words, at p. 732 S.C.R.: “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 holder’s 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, [1991] O.J. No. 1457 (Gen. Div.), at p. 171 O.R. An interest that vests outside this period is void. As Killeen J. explained in Sutherland Estate, at p. 172 O.R., 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.
(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 landowner 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 this 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 S.C.R. 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 affect a conveyance. Rights of first refusal give the landowner 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.
*source: Ontario Reports
