THE OPTION IN A BIJURAL CONTEXT

Martin Lamoureux, Lawyer, M. Fisc., m.b.a.
Department of Justice Canada

Introduction[1]

Tax legislation often refers to private law concepts, which requires reference provincial private law provinces to provide meaning to these concepts. The reference to the concept of property in tax legislation is an eloquent example. It frequently happens that the applicable private law with regard to a concept differs considerably according to whether the civil law of Quebec or the common law of the other provinces is the applicable law. In fact, this is the case for the concept of property.

The recourse to the provincial private law has always been relevant, but since the recent adoption of article 8.1 of the Interpretation Act[2], it has become imperative. When one seeks to determine the scope of a private law concept used within the framework of a federal tax statute, important nuances and distinctions can arise from the application of the same concept in each of the two legal systems. However, the same concept applied differently in the two legal systems will sometimes have the same legal consequences in a tax statute. In our opinion, the concept of the option is a concrete example of this last statement.

Consequently, the object of this chronique will be to determine the nature of the option in civil law and common law[3]. More precisely, we will define the rights which the grantee of an option in civil law has and will do the same for the rights held by the grantor of an option in common law. Once these parameters are established, we will answer the two following questions: At civil law, is an option a (real)right[4] in the property to which it refers or does it constitute a personal right for the grantee? At common law, does an option constitute an interest in property for its grantee?

It is very important to answer these two questions because the Income Tax Act[5] does not define the concept of option.

1. The concept of "option" in civil law [6]

In general, an option is the ability to accept or renounce a right. In the Civil Code[7], options arise in particular with respect to successions (art. 630 et seq. C.C.Q., art. 741 C.C.Q.)[8] and contracts (1396 C.C.Q.).[9]

As to contracts, an option is the right to take advantage of a unilateral promise to enter into a contract, particularly in the context of the sale of property. The exercise of an option refers to the indication by the grantee of his intention to accept the grantor's offer to enter into a contract.[10] This acceptance results in the obligation to enter into the contract.[11] In fact, this is set out in article 1396 C.C.Q.:

Article 1396 An offer to contract made to a determinate person constitutes a promise to enter into the proposed contract from the moment that the offeree clearly indicates to the offeror that he intends to consider the offer and reply to it within a reasonable time or within the time stated therein.

A mere promise is not equivalent to the proposed contract; however, where the beneficiary of the promise accepts the promise or takes up his option, both he and the promisor are bound to enter into the contract, unless the beneficiary decides to enter into the contract immediately.

An option, whether or not it is exercised, is a personal right and not a real right.[12] With respect to contracts, the exercise of an option transforms a unilateral promise into a bilateral promise that generally does not amount to a sale or a conveyance of the property. It is a movable debt under which the grantee could, in the future, compel the grantor to carry out the sale or purchase.[13] This position reflects the majority opinion of the case law and the commentators that the exercise of an option does not create a real right that can be registered for the purposes of publication.[14] The exercise of an option is not binding on third parties. Accordingly, if the property that is the subject of a bilateral promise is sold to a third party in good faith, the beneficiary of the promise has no case against that third party[15] and can only seek damages from the promisor.[16]

The exercise of an option may lead to

  1. an undertaking to enter into a contract of sale at a later date through which ownership will be transferred; or
  2. the immediate conclusion of a contract of sale through which ownership is transferred.[17] In the latter case, the exercise of an option must either be accompanied by the immediate delivery by the promisor-vendor and the actual possession of the property by the promisor-purchaser, which results in an immediate transfer of ownership of the property because the contract of sale takes effect immediately or the parties decide to conclude the sale upon acceptance of the promise without the property having been delivered.[18] In both those situations, the transfer of ownership is not a result of the exercise of the option but rather of the sale.

2. The concept of “option” in common law[19]

The concept of “option”, when used in a common law context, may be described as a right usually acquired by contract to accept or reject an offer within a prescribed period.[20]

Also, in common law, as in civil law, the grantee of an option may exercise that option on personal property as well as on real property.

An option is “an undertaking on the part of the grantor that he will sell certain property to the grantee if the latter wishes to purchase it within a specified period of time.”[21] At common law, the grantee can convert the option into a contract of sale where that person complies with the conditions specified in the contract setting out the option.[22]

An option has three principal features:

  1. irrevocability of the offer to sell;
  2. specification of how the contract of sale may be created; and
  3. obligation of the parties to the contract to be bound by the contract of sale once the option is exercised.[23]

Furthermore, an option must be distinguished from a contract of sale and from an offer to sell. A contract of sale implies a reciprocal obligation to purchase and sell property, whereas an offer to sell may be revoked at any time prior to its acceptance. An option simply gives the right to purchase without any obligation to do so.[24] Once an option is given to the grantee, it cannot be revoked; that option will become null and void once the time set in the contract lapses.

There is also a difference between an option and a right of first refusal. Unlike an option, the grantor of a right of first refusal is not compelled to convey his or her property at the request of the grantee. The grantor's only obligation is to offer to sell the property to the grantee if the grantor decides to sell.[25] In contrast to an option, where the grantee may have an equitable interest in the property that is subject to the option, as will be seen below, the right of first refusal does not confer an equitable interest on its grantee.[26]

2.1 The nature of the right resulting from an option

In order to determine the type of interest the grantee holds in the property on which he or she has an option, it is necessary to determine if the grantee has a remedy of specific performance or merely a remedy of damages. First, it should be pointed out that in common law there are legal interests and interests in equity[27].

At common law, still with regard to the exercise of the rights of a grantee, where a person has the right to exercise a remedy of specific performance against a property because the party that conferred the option did not meet their contractual obligations, that person is said to hold an interest in equity in the property in question. However, where a person is entitled only to damages (giving rise only to a right to damages), that person's rights are purely personal[28].

2.2 Personal property vs. real property

Traditionally, the common law has drawn a distinction between the type of the remedies granted in real property in contrast to those granted in personal property. Now, the courts have lessened this distinction.

As to personal property, the Supreme Court of Canada has established that in order for a court to grant a remedy of specific performance with respect to contracts concerning personal property, the plaintiff must show that the property is unique and irreplaceable.[29]

With regard to real property, at one time common law considered that, in contrast to personal property, all real property was unique[30] and commentators agreed that an option granted on real property normally created an interest in equity because the remedy of specific performance was granted almost mechanically[31]. This premise was based on the fact that at one time common law regarded every piece of real estate as intrinsically unique.[32] However, this latter statement must be qualified because of the progress of modern real estate development.[33] In fact, nowadays, most real property is mass produced, which tends to make such property less and less unique and irreplaceable.[34]

This is why the common law courts decided to apply a uniform test for both real and personal property to determine whether it is possible for the injured party to obtain a remedy of specific performance (the return of the property) as opposed to damages[35]. In our opinion, in respect of the concept of option, the uniform test will be applicable to both real property and personal property even though the Supreme Court of Canada has held in numerous decisions that an option to purchase land creates an equitable interest[36]. Consequently, since the decision in Semelhago, even if the grantee has an option to purchase land, the option does not necessarily confer to the grantee an equitable interest.[37]

2.3 Is an option an interest in equity?

The applicable test to determine whether an option confers on the grantee an interest in equity in the property or a purely personal interest for which the grantee can only request monetary compensation is set out in Asamera Oil Corp. v. Seal Oil & General Corp.[38] In this decision, the Supreme Court ruled that “[b]efore a plaintiff can rely on a claim to specific performance (...) some fair, real, and substantial justification for his claim to performance must be found.”;[39] These equitable reasons are based on the uniqueness of the property[40] or the fact that the property would be difficult to replace[41] and also in the particular context in which the plaintiff based his action. However, this criterion will not be used if the option was granted on the property for the purpose of speculation or to purchase it as an investment.[42] The plaintiff has the burden of proving the uniqueness of the property. Courts have always considered the remedy of specific performance as being an extraordinary remedy granted in the specific circumstances where the common law could not compensate for an injustice.[43] A remedy of specific performance is therefore only available where damages are not a sufficient to compensate the injuries caused by a breach of contract.

Conclusion

In civil law, an option and the rights that result from the exercise of an option are not real rights, that is, rights over property, but rather personal rights.

At common law, an option grants an equitable interest if the grantee can show that the remedy of damages is not sufficient compensation where the grantor of the option fails to meet his or her commitments and that the grantee is entitled to specific performance. Otherwise, the option only confers personal rights on the grantee. The applicable test to decide this issue is whether the property is unique and irreplaceable with respect to equitable principles.

Footnotes

  • [1] The writer wishes to thank Me Marie-Claude Gaudreault and Me André Ouellette for their collaborations to the redaction of the present chronique as well as Me Aline Grenon, Me Sandra Hassan and Me Benoît Mandeville for their valuable comments in the revision of this chronique. The opinions expressed in this paper are the sole responsibility of the author and are not necessarily those of the Department of Justice of Canada.

  • [2] R.S.C. 1985, c. I-21 (the “Interpretation Act”).

  • [3] We emphasize that the analysis of the concept of "option" is limited only to existing property.

  • [4] In this particular context, the term “right” refers only to the concept of real right as opposed to personal right.

  • [5] R.S.C. 1985 (5th Supp.), c.1 (the “I.T.A.”).

  • [6] This section that pertains to civil law was written by Marie-Claude Gaudreault.

  • [7] L.Q. 1991, c. 64.

  • [8] Germain Brière, Les successions, Traité de droit civil, P.-A. Crépeau dir., (Cowansville: Yvon Blais, 1994), at p. 195, no. 154.

  • [9] Maurice Tancelin, Des obligations : actes et responsabilité, 6th ed., (Montréal: Wilson & Lafleur, 1997), at p. 251, no. 500.

  • [10] Michel Filion, Dictionnaire du Code civil du Québec, (Saint-Nicolas: Éditions associations et entreprises, 1998), under “option” and “levée de l'option.” See also Centre de recherche en droit privé et comparé du Québec, Dictionnaire de droit privé et lexiques bilingues, (Cowansville: Yvon Blais, 1991), under “option” and “levée de l'option.” [exercise of an option]

  • [11] Brigitte Roy, Les mutations immobilières, Collection pédagogique, Chambre des notaires du Québec, 1995, at p. 5.

  • [12] Denys-Claude Lamontagne, Biens et propriété, 3rd ed. expanded and revised, (Cowansville: Yvon Blais, 1998), at p. 49, no. 96; Pierre-Gabriel Jobin, La vente dans le Code civil du Québec, (Cowansville: Yvon Blais, 1993), at p. 39, no. 53; Pierre-Claude Lafond, Précis de droit des biens, (Montréal: Thémis, 1999), at p. 176. See Therrien v. Arto Inc., [1981] C.A. 662.

  • [13] Pierre-Gabriel Jobin, La vente dans le Code civil du Québec, (Cowansville: Yvon Blais, 1993), at p. 39, no. 53.

  • [14] Ibid p. 40, no. 55.

  • [15] Ibid p. 39, no. 53.

  • [16] Jean Pineau, Danielle Burman & Serge Gaudet, Théorie des obligations, 3rd edition, (Montréal: Thémis, 1996), at p. 104; supra, note 4, pp. 6-7.

  • [17] Supra, note 9, pp. 101-103.

  • [18] 1710 C.C.Q.; supra, note 6, Pierre-Gabriel Jobin, La vente dans le Code civil du Québec, p. 41, no. 56.

  • [19] Me André Ouellette has collaborated to the redaction of this section.

  • [20] The PAJLO / POLAJ dictionary, Dictionnaire canadien de la Common Law : Droit des biens et droit successoral / Canadian Common Law Dictionary: Law of Property and Estates, (Cowansville, Quebec: Yvon Blais / The Canadian Bar Association, 1997), p. 423 defines “option” as “[a] right usually acquired by contract to accept or reject a continuing offer within a prescribed period. When supported by consideration it constitutes an irrevocable offer binding on the grantor of the option. The person in whose favour it is made, the grantee, assumes no obligations. An option to purchase land, for instance, is not a contract for the sale and purchase of land.” (Emphasis added).

  • [21] R. Megarry & W. Wade, The Law of Real Property, 6th ed. (London: Sweet & Maxwell, 2000), p. 646.

  • [22] See Halsbury's Laws of England, 4th ed., Reissue, vol. 42, p. 23.

  • [23] Ibid.

  • [24] Metropolitan Homes Ltd. v. Politzer, [1976] 1 S.C.R. 363, para. 9.

  • [25]Michel Bastarache and Andréa Boudreau-Ouellette, Précis du droit des biens réels, 2nd ed., (Cowansville, Quebec: Les Éditions Yvon Blais Inc., 2001), p. 226.

  • [26] Canadian Long Island Petroleums Ltd. v. Irving Industries, [1975] 2 S.C.R. 715.

  • [27] Legal interests are considered to be in rem interests and are therefore opposable to all, whereas interests in equity are opposable to a limited number of persons only. For example, in contrast to the holder of a legal interest, the holder of an interest in equity cannot claim the property from a good faith third party.

  • [28] Supra, note 21, p. 32-34; A.H. Oosterhoff and W.B. Rayner, Anger and Honsberger, Law of Real Property, vol. 1, 2e éd., Aurora, Canada Law Book, 1985, p. 40 et E.H. Burn, Cheshire and Burn's Modern Law of Real Property, 15e éd., Londres, Butterworths, 1994, p. 41.

  • [29] Asamera Oil Corp. v. Seal Oil & General Corp., [1979] 1 S.C.R. 633. See also Gleason v. Dawn Light, [1996] F.C.J. No 597.

  • [30] See, inter alia, Roberto v. Bumb, [1943] O.R. 299 (C.A.), p. 311; Kloepfer Wholesale Hardware and Automotive Co. v. Roy, [1952] 2 S.C.R. 465 and Nepean Carleton Developments Ltd. v. Hope, [1978] 1 S.C.R. 427.

  • [31] Norman Siebrasse, "Damages in lieu of Specific Performance: Semelhago v. Paramadevan" (1997), 76 Can. Bar Rev. 551; D.H. Clark, "Will that be Performance ... or Cash?: Semelhago v. Paramadevan and The Notion of Equivalence" (1999), 37 Alta. L.R. (3d) 589; O.V. DaSilva, "Case Comment: The Supreme Court's Lost Opportunity: Semelhago v. Paramadevan" (1998), 23 Queen's L.J. 475.

  • [32] Semelhago v. Paramadevan [1996] 2 S.C.R. 415, para. 20 (hereinafter “Semelhago”).

  • [33] Ibid.

  • [34] Chaulk v. Fairview Construction Ltd. (1977), 14 Nfl. & P.E.I.R.13, p. 21.

  • [35] Baird v. Red Bluff Inn Ltd., [1997] B.C.J. No. 1152, para. 39; Cross Creek Timber Traders Inc. v. St. John Terminals Ltd., [2002] N.B.J. No. 77, para. 208; Greenforco Holding Corp. v. Yonge-Merton Developments Ltd [1999] O.J. No. 3232, para. 99; Tropiano v. Stonevalley Estates Inc., [1997] O.J. No. 6337, para. 16; Peate v. Elmsmere Ltd. Partnership, [1997] O.J. No. 4871, para. 20.

  • [36] Frobisher Ltd.v. Canadian Pipelines & Petroleums Ltd., [1960] S.C.R. 126 ; Metropolitain Homes v. Politzer, [1976] 1 S.C.R. 363; Irving industries (Irving Wire Products Division) Ltd. v. Canadian Long Island Petroleums Ltd., [1975] 2 S.C.R. 715.

  • [37] Picavet c. Salem Developments Ltd., [2000] O.J. No. 2806, par. 80.

  • [38] Supra, note 24; see also McNabb v. Smith (1981), 124 D.L.R. (3d) 547, p. 551.

  • [39] Asamera, Ibid.

  • [40] [1999] O.J. No. 355 (C.J.), par. 14.

  • [41] John E. Dodge Holdings Ltd. v. 805062 Ontario Ltd. 56 O.R. (3d) 341.

  • [42] McNabb v. Smith (1981), 132 D.L.R. (3d) 547.

  • [43] Supra, note 22.

Date modified: