Weighing Your Options: The Duty To Cooperate In Exercising Options To Repurchase Land

In Jones v. Quinn, 2024 ONCA 315, the Ontario Court of Appeal summarized the current law for determining whether a contractual right is a unilateral or bilateral “option” and reiterated the strict compliance required for the exercise of those options. The Court clarified—and arguably expanded—the duty of good faith in responding to the exercise of an option, signalling that the duty of good faith will protect a party from unreasonable efforts to prevent the option's exercise.

What you need to know

• The requirements of an option can be made out through a contract's factual matrix.  The Court of Appeal considered whether a buyback purchase right was a unilateral option. This matters because optionees must strictly comply with the terms of an option or else lose their only chance to exercise it—which, in this case, was to complete a buy-back of land. While the short, plain language buy-back provision did not expressly set out how it was to be exercised—a requirement of an option—the Court refused to limit its interpretation to the language of the agreement in isolation. Instead, it looked at the factual matrix surrounding the contract's formation and held that the requirement of notice of a purchase was sufficiently clear to make out an option.
• There is a duty to cooperate in the exercise of an option.  The Courtextended the good faith contractual performance obligations set out by the Supreme Court of Canada, finding that there is a duty between parties to cooperate in the exercise of an option.
• Those who frustrate attempts to exercise an option may be found in breach of contractual obligations.  In this case, the agent for the seller obstructed the buyers' attempt to exercise their option to repurchase their property and was therefore found in breach of the agreement. The agent refused to sign the purchase agreement, and changed positions just days before the scheduled closing to assert that an agreement was not necessary. He also refused to provide the name of the seller's lawyer to effect the sale, and waited until the day of closing to indicate that the seller had retained counsel. The seller was therefore found in breach of the contract for having failed to discharge his obligations under the contract in good faith.

The details

Background

In 2017, Ms. Jones (the buyer) transferred a 100-acre property to Mr. Quinn (the seller), for temporary financing relief. The transfer was conducted pursuant to an agreement of private purchase and sale, which included a single paragraph buy-back provision written in plain English:

Within eight years of the date of purchase, Linda Jones may purchase the property back from Elwood Quinn for what he paid her for it ($300,000) plus a 5% compounded [delete compound replace with "annual"] interest on $300,000, plus the accumulated deferred rent of $500 per month. [Emphasis in original to denote handwritten portion].

On March 24, 2021, the buyer delivered an unconditional offer to purchase the property in the form of an Agreement of Purchase and Sale (the APS). The offer was irrevocably open for acceptance until March 26, 2021. On March 26, the seller's agent acknowledged receipt, but did not sign the APS. Some correspondence was subsequently exchanged between the seller's agent and the buyer's counsel, but the APS remained unsigned. The proposed closing date under the APS was May 31.

The application judge found that the seller—through his agent—was often confrontational, argumentative, vague and unresponsive, refusing to confirm a purchase price or closing date for the proposed transfer or engage in reasonable discussions to finalize the terms of the property transfer. Specifically, the seller's agent did not advise that he had retained counsel until late in the day on the proposed closing date, May 31, despite repeatedly being asked by counsel for the buyer. On May 31, the seller made two requests of the buyer and her counsel to provide the information necessary to complete the transfer. Later that day, the seller's agent advised that the seller's counsel was standing by to accept the funds and effect the transfer, but still did not identify his counsel.

The transaction failed to close, and the seller's agent advised the buyer that due to her failure to tender, she had breached the buy-back provision.

The parties brought several applications to the Superior Court. The application judge held that since the seller did not accept the unconditional offer made to him, there was no agreement to sell the property. Therefore, the buyer did not breach the APS by failing to tender. The application judge ordered a mandatory injunction requiring the seller to allow the buyer to repurchase the property in accordance with the buy-back provision.

The seller appealed.

Key issues

There were two key issues on appeal. The first was whether the buy-back provision in the agreement should have been interpreted as an option, rather than an “agreement to agree.” If so, was the option breached? Second, is there an obligation to cooperate in the exercise of an option? If so, was the obligation to cooperate breached?

The Court's decision

The Court accepted the seller's submission that the buy-back provision was properly characterized as an option: an irrevocable offer, backed by consideration, which the buyer could invoke according to its specifications. Importantly, options require strict performance of their terms, meaning that unless the buyer complied strictly with the terms of the option, they would not be able to purchase the land. Nonetheless, the Court dismissed the appeal on the grounds that the cause of any alleged failure by the buyer to comply with the terms of the option was the seller's failure to cooperate in its exercise.

Determination of an option

Having found that there was an extricable error of law, the Court applied the correctness standard in determining whether the buy-back provision was an option. The Court looked to the three principal elements of an option set out by the Supreme Court in Mitsui & Co. (Canada) Ltd. v. Royal Bank:

1. Exclusivity and irrevocability of the offer to sell within the time period specified in the option;
2. Specification of how the contract of sale may be created by the option holder; and
3. Obligation of the parties to enter into a contract of sale if the option is exercised.

Only the second Mitsui  element was at issue in this case. The buyer argued that because the buy-back provision did not explicitly lay out how the buyer could exercise her right to repurchase the property, it did not meet the requirements of an option. While the Court agreed that the words of the provision in isolation were not sufficient to meet this condition, it infused the modern contractual interpretation approach set out in Sattva Capital Corp. v. Creston Moly Corp.,2014 SCC 53 into Mitsui  in order to consider the provision's surrounding factual matrix.

Specifically, the court found that the context of the agreement (namely, that it was a real estate transaction) demonstrated the intention of the parties to provide a right to repurchase, exercisable through the provision of notice to that effect. According to the Court's interpretation, notice would allow the parties to work out any necessary procedural formalities. Thus, having found that all three Mitsui  features were met, the Court concluded that the buy-back provision was best characterized as an option, rather than an agreement to agree.

Duty to cooperate in the performance of an option

Building on Bhasin v. Hrynew, 2014 SCC 71, the Court acknowledged that good faith contractual performance “manifests itself in various more specific doctrines governing contractual performance.” Per the Alberta Court of Appeal, this list of doctrines is not closed, but includes the duty of cooperation between the parties to achieve the objects of the contract.

With the duty to cooperate in mind, the Court found that the seller's agent failed to cooperate by taking reasonable steps to facilitate the sale of the property. Specifically, the nature and tone of the communication from the seller's agent made it impossible to come to terms on the transfer, and he continuously put up "roadblocks" for the buyer, including changing positions just days before the scheduled closing to assert that an agreement was not necessary, refusing to identify the seller's lawyer to effect the sale, and waiting until the day of closing to indicate that the seller had retained counsel. As a result, the seller, through his agent, was found in breach of the agreement for having failed to discharge his obligations under the contract to cooperate.

Bilateral versus unilateral options

Having found the seller in breach of his good faith contractual performance obligations, the Court declined to address the seller's argument that the buy-back provision was a unilateral option that required the buyer to strictly comply with its terms, or else lose her only chance to complete the buy-back. Still, the Court noted that contrary to the seller's argument, not all options are unilateral. Rather, options can also be considered bilateral in cases where the option is closely linked with another contract between the parties. Importantly, bilateral options require only substantial performance of their terms, rather than strict performance.

Implications

The decision is a reminder that when a contractual term is interpreted as an option, a higher standard of compliance will be imposed. This is alleviated, however, by the Court's willingness to consider options in certain specified circumstances to be bilateral, rather than unilateral, requiring only substantial, rather than strict, performance with their terms. Nonetheless, parties should ensure they are intentional when drafting, not just in the option language itself, but in any related provisions that would form part of the contract's factual matrix (which a court may interpret as a means of determining the intention of the parties).

This decision also affirms the increasing scope of the duty of good faith, including the duty to cooperate, and demonstrates that where parties have not specifically outlined a procedure for the exercise of an option, the duty of good faith will protect a party from its counterpart's unreasonable efforts to prevent the option's exercise. It also serves as a warning to any optionors who may unwittingly be of the view that failure by the optionee to adhere to the strict requirements of the option clause will render the exercise of that option by the optionee void.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.