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Real Property - Option to Purchase v Right of First Refusal

2123201 Ontario Inc. v. Israel Estate (Ont CA, 2016)

In this Court of Appeal case the court usefully discusses the distinction between an option to purchase land, versus a right of first refusal:
[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., 1974 CanLII 190 (SCC), [1975] 2 S.C.R. 715; McFarland v. Hauser, 1978 CanLII 164 (SCC), [1979] 1 S.C.R. 337; Metropolitan Homes Ltd. v. Politzer, 1975 CanLII 208 (SCC), [1976] 1 S.C.R. 363; Benzie v. Kunin, 2012 ONCA 766 (CanLII), 112 O.R. (3d) 481; and Harris v. McNeely (2000), 2000 CanLII 29062 (ON SC), 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 holder’s 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 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), 1991 CanLII 7120 (ON SC), 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.

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