Upon the conveyance of land, a vendor’s retention of repurchase rights may later raise issues with respect to the vendor’s continuing interest in the property. When will such rights be capable of enforcement?
In a case recently considered by the Ontario Court of Appeal, in a 1931 conveyance of lands containing a gravel pit, the vendor had retained a “first option to purchase” following removal of the gravel by the purchasers. The purchasers had the “discretion” and “authority” to determine when the gravel had been removed. Upon application by the current owner of the property for determination that the vendor’s retained interest had lapsed, the application judge dismissed the application on the basis that the vendor’s contractual repurchase rights (now held by his estate) continue to be enforceable.
The appellate court described the issue on appeal:
“A sells land to B. At the same time, A and B enter into an agreement that A can repurchase the land if a condition under B’s control is met. Does the agreement give A an interest in the land, or only a personal contractual right? This appeal turns on the answer to that question …
“[The current owner] contended that the agreement was an option agreement, which gave [the vendor] an immediate, equitable interest in the land. Because his interest in the land had not vested, the agreement was void and unenforceable under the rule against perpetuities.
“The estate contended that the agreement gave [the vendor] a right of first refusal, which was not an interest in land, but was merely a personal right. As the agreement did not give [the vendor] an interest in land, the rule against perpetuities did not apply and the estate may still enforce [the vendor’s] ‘first option to purchase’ under the agreement.”
In allowing the appeal and granting the current owner’s requested application, the appellate court disagreed with the application judge’s characterization of the vendor’s repurchase rights. It determined that the parties to the conveyance had intended that the vendor retain an equitable interest in the land and that the rule against perpetuities required that such an interest have vested no later than 21 years after the vendor died. The court distinguished between options to purchase and rights of first refusal:
“… the jurisprudence establishes that options to purchase create immediate interests in lands; 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 … options to purchase give the option holder control over the decision to effect a conveyance. Rights of first refusal give the landowner control over the decision to convey. But … other case law shows that in some circumstances control over the exercise of the option is not determinative.”
In finding that the intention of the parties had been to create for the vendor an immediate interest in land, the court commented:
“Instead of focussing on the question of control, I view the issue as one of contract interpretation: to determine the true intent of the parties at the time the agreement was made. In my opinion, the purpose of the agreement, the context in which it was made, its terms, and the conduct of the parties under it show an intention to give [the vendor] an option to repurchase the land, which gave rise to an immediate, equitable interest in the land.
“The terms of the agreement bolster this conclusion. In para. 1 of the agreement, [the vendor’s] right is termed a ‘first option to purchase’, not a right of first refusal. Although the label by itself is not determinative, para. 6 also shows that the parties intended that [the vendor] have an immediate interest in the land. Under that paragraph, [the vendor] agreed to execute a quitclaim if part of the land was needed to widen or alter the road adjoining the land. If all [the vendor] had was a right of first refusal, he would not have to quitclaim anything. But if he had an equitable interest in the land created by an option to purchase, he would have had to give a quitclaim.
“Any doubt, however, about the parties’ intention when they signed the agreement has been resolved by how the parties have acted under the agreement … Here, the parties’ later conduct shows that they viewed the agreement as creating an immediate interest in land. In 1950, when a portion of the land was conveyed to the school board, [the vendor] joined [the purchasers] 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.”
In the result, the court concluded:
“The purpose of the agreement and the context in which it was made, its terms, and the later conduct of the parties under the agreement, together show that the intent of the agreement was to give [the vendor] an immediate, equitable interest in the land. The interest was contingent on the exercise of the option to purchase. As the option has not been exercised, the interest has not vested within the perpetuity period and is now void.”
Whether or not a vendor’s retention of repurchase rights remains enforceable may depend upon the proper characterization of those rights as creating an interest in land or simply a personal contractual right. Rights creating an interest in land not exercised within the relevant perpetuity period may lapse.