September 9th - 2007

Merv’s Column: No option

A 74 acre parcel of farmland sold for $850,000 in a Purchase Agreement that contained an addendum that was allegedly drafted to allow the seller to acquire title to the farm’s residential parcel if the rest of the property was ever subdivided.

A 74 acre parcel of farmland sold for $850,000 in a Purchase Agreement that contained an addendum that was allegedly drafted to allow the seller to acquire title to the farm’s residential parcel if the rest of the property was ever subdivided.
 
The transaction was completed and the parties executed a Tenancy and Option to Purchase Agreement. The courts held that the Option Agreement contravenes s. 50 of the Planning Act, because it creates an equitable interest in the optioned land while purporting to allow the grantor to retain the abutting lands. The courts further concluded that the contravention is not remedied by s. 50(21) of the Planning Act.
 
Section 50 of the Planning Act controls the subdivision of land in Ontario. Section 50(3)(b) provides that “no person shall convey” any interest in land where such person retains an interest in “any land abutting the land that is being conveyed or otherwise dealt with”, unless the abutting land “is the whole of one or more lots or blocks within one or more registered plans of subdivision.”
 
Non-compliance with the Planning Act is fatal to an agreement. However, an agreement in contravention of s. 50(3)(b) may be remedied by s. 50(21) of the Act, which provides that: “An agreement, conveyance, mortgage or charge made, or a power of appointment granted, assigned or exercised in contravention of this section or a predecessor thereof does not create or convey any interest in land, but this section does not affect an agreement entered into subject to the express condition contained therein that such agreement is to be effective only if the provisions of this section are complied with.”
 
The seller argued that Clause 12 of the Purchase Agreement, a standard provision, was incorporated into the Option Agreement as a result of the language employed in the latter agreement. They said that the incorporation amounts to an express condition that satisfies subsection 50(21) of the Planning Act. Clause 12 says: “Provided that this Agreement shall be effective to create an interest in the property only if the subdivision control provisions of The Planning Act are complied with by Vendor on or before completion and Vendor hereby covenants to proceed diligently at his expense to obtain any necessary consent on or before completion.”
 
But, that clause clearly relates to the completion of the sale of “the property”, defined therein as all seventy-four acres of the property, and not to the optioned property. It relates to the completion of the sale by the “Vendor,” defined in the Purchase Agreement. Accordingly, this provision cannot provide the express condition required by s. 50(21) of the Planning Act to remedy the Option Agreement. The courts held that the option was void. http://www.canlii.org/on/cas/onca/2006/2006onca10783.html
 
Merv's Comments
That is a harsh, but legally correct, result that could have been avoided if the parties had used a proper Option Agreement such as OREA’s Form 103.

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