The Importance of Registering an Option to Purchase on Title to the Property

Peedham v 1000516033 Ontario Ltd.

By Tonya Mah

If you are a commercial tenant and have an option to purchase the premises, registering notice of the same on title to the property is essential in order to protect this option against potential competing third party’s rights.

There were many things going on in Peedham v 1000516033 Ontario Ltd. (“Peedham”), the gist of the relevant facts are, the landlord was in default of a charge (“Charge”) registered against the leased premises unit (“Premises”) and the Premises became the subject of a power of sale.[1] The mortgagee in possession negotiated a lease with the tenant that contained an option in favour of the tenant to purchase the Premises during the term of the lease or any extensions of the term, for a set purchase price (“Purchase Option”).[2] There were various assignments/transfers of title of the Premises/Charge.[3]  In the end, a subsequent mortgagee in possession, sold the Premises to a third party (“Purchaser”), without notice of the lease, the Purchase Option and without notice to the tenant that a sale of the Premises was occurring.[4]  Thereafter, the Purchaser commenced terminating the lease and sought to evict the tenant.[5] The tenant brought a motion to stay the eviction and exercise its Purchase Option.[6]

The motion judge found in favour of the tenant and directed the Purchaser to sell the Premises to the tenant in accordance with the Purchaser Option.[7]

The disposition of the Court of Appeal set aside the motion judge’s order and stated the following,

The primary purpose of the land titles system is to provide “certainty of title” by ensuring that notice of all interests that may impact on ownership of property are registered on title.[8]

The Land Titles Act states that only the parties to an unregistered instrument, are deemed to have notice of it.[9] This means that third parties (such as new owners of a property, mortgagees etc.) are not deemed to know about things, such as existing tenancies and options to purchase, unless notice of the same is registered on title to the property. Put simply, if it is not registered on title then new owners cannot be said to have automatically known about it. They will be considered “bona fide purchasers” taking title of the property without knowledge of any interest or claim that “differs from what is shown on the register”.[10] In Peedham, the court clarified that “absent fraud, subsequent purchasers for value take land free and clear of unregistered claims that they did not know about”.[11]

The Court of Appeal held that a key error the motion judge made, was treating the new owners as though they were in the same position as the previous owner who had negotiated the option to purchase with the tenants.[12] Justice Favreau stated:[13] there was no evidence regarding whether the Purchaser was aware of the Purchase Option at the time it bought the property, or whether its purchase of the property was an arm’s length transaction. In the absence of evidence on these issues, there was an insufficient evidentiary record for enforcing the Purchase Option against a subsequent purchaser. The Court of Appeal remitted the matter back to the court below to be decided on a proper evidentiary record.

Takeaway

This case highlights the importance of registering on title to the property, notice of an interest in the property (option to purchase, notice of lease etc. ) in order for such interest to be enforceable against third parties.