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Real Property - Options to Purchase. Peedham v. 1000516033 Ontario Ltd.
In Peedham v. 1000516033 Ontario Ltd. (Ont CA, 2025) the Ontario Court of Appeal allowed an appeal (remitting the case back down again), here from "an order granting the respondents the right to exercise an option to purchase a commercial unit under terms set out in a lease agreement and to continue occupying the unit until the purchase is completed".
The court considers whether an option to purchase (here contained in a lease) can to 'run with the land' (though this doctrine is not discussed), under the Land Titles system without notice being given to a subsequent purchaser by it being registered on title:[1] The appellant, 1000516033 Ontario Ltd. (“100”), appeals an order granting the respondents the right to exercise an option to purchase a commercial unit under terms set out in a lease agreement and to continue occupying the unit until the purchase is completed.
[2] As set out below, I would allow the appeal. The appellant was a subsequent purchaser. The option to purchase was not registered on title. There was no evidence regarding whether the appellant was aware of the option to purchase 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 option to purchase against a subsequent purchaser. I would remit the matter back to the court below to be decided on a proper evidentiary record.
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Issue 2: The motion judge erred in finding that the option to purchase was enforceable on the record before the court
[31] The appellant submits that it would be inequitable to require it to sell Unit #9 to the respondents for $350,000 since it purchased the unit for $750,000. The appellant further submits that the motion judge erred in finding that the option to purchase could be enforced against it, given that the option to purchase was not registered on title pursuant to the Land Titles Act, R.S.O. 1990, c. L.5. I agree that the motion judge erred in his analysis of this issue. Specifically, he erred in failing to consider whether the respondents were entitled to exercise the option to purchase given that the appellant was a subsequent purchaser and the option to purchase was not registered on title.
[32] In fairness to the motion judge, it appears that this argument was not explicitly raised before him. However, the issue of the parties’ respective property interests in Unit #9 was squarely at the centre of their dispute. The motion judge even made a finding, as referred to above, that the option to purchase was an equitable interest in the land. It was therefore evident that the parties had competing property interests in a property that the appellant had acquired through power of sale proceedings, and it was therefore necessary to ascertain, based on the applicable statutory provisions in the Land Titles Act and the Mortgages Act, R.S.O. 1990, c. M.40, and the common law, which of the parties’ interest in the land took precedence.
[33] The fundamental question in this case was whether the option to purchase should be enforced against a subsequent purchaser of the property. The respondents’ position is that they bargained for the option to purchase in the lease and were not given notice of the sale to the appellant; they should therefore be allowed to exercise the purchase option regardless of the transfer to the appellant. The appellant’s position is that the option to purchase was not registered on title and therefore cannot be exercised to invalidate the appellant’s registered ownership interest, which benefits from the protection of the Land Titles Act and the Mortgages Act.
[34] Below, I start with the legal principles that apply to the enforceability of an option to purchase against a subsequent purchaser, followed by an analysis of how those principles apply in this case.
Applicable legal principles
[35] The land titles system creates a distinction between interests in property that are registered on title or arise out of instruments registered on title and unregistered interests. As Epstein J. (as she then was) explained in Durrani v. Augier (2000), 2000 CanLII 22410 (ON SC), 50 O.R. (3d) 353, at para. 42, the land titles system is meant to promote the indefeasibility of title:The philosophy of a land titles system embodies three principles, namely, the mirror principle, where the register is a perfect mirror of the state of title; the curtain principle, which holds that a purchaser need not investigate the history of past dealings with the land, or search behind the title as depicted on the register; and the insurance principle, where the state guarantees the accuracy of the register and compensates any person who suffers loss as the result of an inaccuracy. These principles form the doctrine of indefeasibility of title and [are] the essence of the land titles system [Reference omitted.] [36] Pursuant to s. 71 of the Land Titles Act, “any person ‘entitled to’ or ‘interested in’, among other things, any unregistered equity in registered land can be protected by registration” (s. 71(1)), and registration of an instrument “serves to fix with notice anyone acquiring title from the registered owner” (s. 71(2)): Benzie v. Kunin, 2012 ONCA 766, 112 O.R. (3d) 481, at paras. 76, 79.
[37] An option to purchase is an interest in property and can be registered on title pursuant to s. 71 of the Land Titles Act: see e.g., Pelham (Town) v. Fonthill Gardens Inc., 2019 ONSC 567, 99 R.P.R. (5th) 281, at para. 22.
[38] In contrast with the effect of registering an interest in property under s. 71 of the Land Titles Act, s. 72(1) provides that only the parties to an unregistered instrument are deemed to have notice of it:72 (1) No person, other than the parties thereto, shall be deemed to have any notice of the contents of any instruments, other than those mentioned in the existing register of title of the parcel of land or that have been duly entered in the records of the office kept for the entry of instruments received or are in course of entry. [39] This gives effect to the primary purpose of the land titles system, “which is intended to provide ‘certainty of title’ by ensuring that notice of all interests that may impact on ownership of property are registered on title”: Benzie, at para. 82, citing Turta v. Canadian Pacific Railway, 1954 CanLII 58 (SCC), [1954] S.C.R. 427, at p. 443.
[40] The land titles system also protects subsequent purchasers from the effects of interests in the land that were not registered at the time of purchase. Absent fraud, s. 78(4) of the Land Titles Act guarantees the effectiveness of registered instruments in the land titles system by protecting subsequent purchasers who are bona fide purchasers for value, meaning those “who take title without notice of an interest or claim that differs from what is shown on the register”: Sapusak v. 9706151 Canada Ltd., 2024 ONCA 774, at para. 17, citing Martin v. 11037315 Canada Inc., 2022 ONCA 322, 469 D.L.R. (4th) 123 (“Martin (ONCA)”), at para. 66. That section reads as follows:78(4) When registered, an instrument shall be deemed to be embodied in the register and to be effective according to its nature and intent, and to create, transfer, charge or discharge, as the case requires, the land or estate or interest therein mentioned in the register. [41] Actual notice of an unregistered interest in land may compromise a subsequent purchaser’s registered interest in the land. In United Trust Co. v. Dominion Stores Ltd., 1976 CanLII 33 (SCC), [1977] 2 S.C.R. 915, a majority of the Supreme Court held that the doctrine of actual notice applied to unregistered interests in land governed by the version of the Land Titles Act then in force.
[42] Two notes of caution apply to this exception. First, “actual notice” means that a subsequent purchaser actually knew about the unregistered interest; “it is not sufficient that the party has become aware of facts that suggest it should make inquiries”: Stanbarr Services Limited v. Metropolis Properties Inc., 2018 ONCA 244, 141 O.R. (3d) 102, at para. 26.
[43] Second, this court has stated that this exception may no longer be applicable following the 2006 amendments to the Land Titles Act, suggesting that the explicit reference to fraud in ss. 78(4.1) and (4.2) may mean that other exceptions, such as the actual notice exception recognized by the Supreme Court in United Trust, may no longer apply: Stanbarr, at paras. 22-24; Martin (ONCA), at paras. 64-65; Airport Business Park Inc. v. Huszti Holdings Inc., 2023 ONCA 391, 481 D.L.R. (4th) 696, at para. 46, leave to appeal refused, [2023] S.C.C.A. No. 347. However, this court has not resolved the issue and courts below have proceeded on the basis that the exception still applies: see e.g., Martin v. 2670082 Ontario Corp, 2024 ONSC 3982, 61 R.P.R. (6th) 96, at para. 47, appeal as of right to Ont. C.A. filed, COA-24-CV-0864; FirstOntario Credit Union Limited v. Nagra et al., 2024 ONSC 3398, 60 R.P.R. (6th) 115, at para. 37; Parkland Corporation v. 16408117 Canada Inc. et al., 2025 ONSC 201, at para. 44.
[44] In the circumstances of this case, provisions of the Mortgages Act may also be relevant, as they “provide complementary methods of protecting bona fide purchasers for value without notice of a defect in a power of sale proceeding”: Stanbarr, at para. 47. Pursuant to ss. 99(1) and (1.1) of the Land Titles Act, and ss. 35 and 36 of the Mortgages Act, a bona fide purchaser for value has a valid charge against pre-sale encumbrancers despite a defect in the power of sale proceedings so long as the purchaser did not have actual notice of the defect: Stanbarr, at paras. 26-27. Section 36 further provides that when the transfer is valid, those who should have been but were not served with proper notice retain a claim in damages against the party who exercised the power of sale: Glassworkers Social Club v. Forestgate Leasing Inc. (1998), 1998 CanLII 5452 (ON CA), 40 O.R. (3d) 606 (C.A.), at p. 610.
[45] These principles raise two issues relevant in this case. First, absent fraud, subsequent purchasers for value take land free and clear of unregistered claims that they did not know about. Second, assuming the doctrine of actual notice continues to apply following the 2006 amendments to the Land Titles Act, actual notice of an unregistered option to purchase could make a subsequent purchaser’s registered interest bound by that option to purchase.
Discussion
[46] In his analysis, the motion judge erred in failing to consider that the appellant was a subsequent purchaser. He treated the appellant as though it was in the same position as the party who negotiated the option to purchase with the respondents. In considering the equities in this case, the motion judge focused on the respondents’ interests. He found that it would be unfair to the respondents not to allow them to exercise their option to purchase. However, he gave no consideration to the appellant’s position, or to the statutory protections that presumptively apply to subsequent purchasers for value under the Land Titles Act and the Mortgages Act. At most, he stated that it would be open to the appellant to bring a claim against the seller, 110.
[47] Before finding that the option to purchase could be enforced against the appellant, and that the necessary findings could be made from the record as filed, it was incumbent on the motion judge to identify the determinative legal and factual issues. A court order entitling the respondents to exercise their option to purchase Unit #9 could only be effective if the appellant did not benefit from the statutory protections guaranteeing security of title: see Martin (ONCA), at para. 59; Durrani, at paras. 49-51. As a prerequisite to granting such an order, it was therefore necessary for the motion judge to determine whether the appellant’s title was guaranteed under the Land Titles Act.
[48] The motion judge did not make the legal determinations and findings required to resolve these issues. Instead, he simply stated that “the [appellant] may not have been aware of the option to purchase due to a lack of proper disclosure in the power of sale proceedings”. In fact, there is no evidence in the record of what the appellant did or did not know about the option (or the lease). A connected question is whether the sale from 110 to 100 was an arm’s length transaction; in other words, even if 110 did not inform the appellant about the option to purchase, is this information that the appellant had or had access to through a common ownership or interest: see Belende v. Patel, 2009 CanLII 74 (Ont. S.C.), at para. 17. Going further in the inquiry, if this was not an arm’s length transfer, was it meant to defeat the option to purchase? There was no evidence on these issues in the record, and the motion judge proceeded on the basis that such inquiries were irrelevant when in fact they were crucial to determining the rights of the parties in this case.
[49] Given the absence of evidence in the record on these key issues, it is not possible for the court to decide the matter. In the absence of submissions from the parties on the issue, it would also not be appropriate for this court to finally determine the issue raised in Stanbarr of whether the actual notice exception recognized in United Trust still applies.
[50] I would therefore set aside the order declaring the respondents to have legally exercised their option to purchase Unit #9 and directing the appellant to cause the property to be sold to the respondents for $350,000. I would also remit this matter back to the motion judge or another judge for a trial of the issue of whether the appellant was a bona fide purchaser for value without notice that Unit #9 was subject to a lease that included an option to purchase the property for $350,000, and, if so, whether the appellant is entitled to the protection of s. 78(4) of the Land Titles Act or other provisions of that Act or the Mortgages Act, such that the respondents are precluded from exercising their option to purchase the property.
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