The recent decision of Justice Cavanagh of the Ontario Superior Court of Justice (Commercial List) in CIM Bayview Creek Inc., Re, 2021 ONSC 220 addresses a wide variety of issues related to the enforceability of options to purchase land owned by an insolvent debtor.
Most importantly, it seems that an option to purchase land may never be able to be vested out in an approval and vesting order without the option holder’s consent. An option holder thus may effectively hold a blocking position with respect to any attempts to sell that land which may imperil a restructuring that is dependent on doing so.
The decision, which has been appealed, reinforces that secured lenders, purchasers and insolvency professionals should be mindful of whether a debtor company’s real property assets may be subject to an option to purchase.
While the complicated history of the relationship between CIM Bayview Creek Inc. (“CIM Bayview”) and the Bryton Group is set out in detail in the decision, the essential facts are that:
- CIM Bayview was a developer of a residential subdivision in Richmond Hill, Ontario.
- Bryton Capital loaned $20 million to CIM Bayview and was granted a mortgage on the property and an option to purchase the property for approximately $41.7 million if the mortgage was not paid in full by the maturity date.
- CIM Bayview filed a notice of intention to make a proposal on October 29, 2020 (just prior to the maturity date) after various debenture holders obtained a Mareva injunction freezing its assets.
- On December 7, 2020, CIM Bayview delivered a notice of intention to disclaim the option agreement.
- On December 11, 2020, the Bryton Group delivered a notice that it intended to exercise its option to purchase the property.
Option Cannot be Disclaimed or Vested Off
CIM Bayview and the Bryton Group each brought motions related to the enforceability of the option to purchase and CIM Bayview’s ability to disclaim it. Justice Cavanagh made the following notable holdings with respect to the option:
- An option to purchase creates a proprietary interest in land and cannot be disclaimed.
This is consistent with prior case law in Ontario holding that an option to purchase does create an immediate equitable interest in land in favour of the option holder. Also note that, although it was not in issue in this case, options to purchase run with the land and are enforceable against a subsequent purchaser of the land with notice of the option. Rights of first refusal, on the other hand, are personal rights between the two parties and do not create an interest in land and do not run with the land.
- The interest of the option holder in the land should not be extinguished in a vesting order.
Justice Cavanagh applied the framework developed by the Ontario Court of Appeal in Third Eye Capital Corporation v. Resources Dianor Inc./Dianor Resources Inc., 2019 ONCA 508 (“Dianor”), for determining whether an interest in land should be vested off, which is discussed in detail in our prior article here. In short, that framework contemplates that the Court will inquire as to whether the interest in land is more akin to a fixed monetary interest that is attached to the real property (such as a mortgage or municipal tax lien) or whether it is more akin to a fee simple that is in substance an ownership interest in some ascertainable feature of the property itself. The closer the interest is to the latter end of the spectrum, the less appropriate it will be to extinguish the interest without the consent of the interest holder.
The interest of the holder of an option to purchase that has given notice of its intention to exercise its option, provided that they can meet the exercise conditions, is very close to being a fee simple interest. Since the Bryton Group was not consenting, Justice Cavanagh held that it would be inappropriate to extinguish their interest in a vesting order as doing so “would amount to expropriation of the [Bryton Group’s] proprietary interest in the Property.” This seems to indicate that it may never be appropriate to vest out an option to purchase land without the consent of the option holder.
- The difference between the market value of the property and the option price is not “interest” for the purposes of applying the criminal rate of interest provision in section 347 of the Criminal Code.
Canadian courts generally will not enforce an agreement that charges interest at a rate above the criminal rate of interest (60% per annum) on the basis that doing so would be contrary to public policy. Depending on the circumstances, the agreement may be completely voided or the interest rate may be reduced to 60% or less. While the definition of “interest” in section 347 of the Criminal Code is extremely broad, it requires a charge or expense that is paid or payable by the debtor for the advancing of credit. Justice Cavanagh held that the exercise of the option by the Bryton Group would not require any payment to be made by CIM Bayview, therefore it did not fall within that definition.
- An option which can only be exercised if the owner is in default does not violate section 8 of the Interest Act.
Section 8 of the Interest Act prohibits a fine, penalty or interest rate increase from being charged on loan arrears where the loan is secured against land. Justice Cavanagh held that the option, which could only be exercised if the maturity date passed without payment in full to the Bryton Group, did not violate section 8 of the Interest Act as it did not impose a monetary payment by CIM Bayview for breach of its obligations under the mortgage.
Justice Cavanagh lifted the stay of proceedings to permit the Bryton Group to exercise its option to purchase.
Takeaways: Consider the Options
The decision highlights the strong position of the holder of an in-the-money option to purchase land owned by an insolvent debtor. It appears that, unless the option itself can be impugned on the basis that it was unconscionable or that the option holder does not have the ability to exercise it, the option holder effectively holds a blocking position with respect to any attempts to sell that land for the general benefit of creditors. As a result:
- secured lenders should take extra care to investigate whether any valuable real property assets of a borrower are subject to an option to purchase that is below market value as that may significantly reduce the expected recovery on that property;
- purchasers of land should ensure that there are no options registered on title to the property or present in leases or other documents that might be typically reviewed in the context of a land purchase, as the option may run with the land and bind the purchaser; and
- insolvency professionals, when reviewing the real property assets of a debtor company and considering sales processes and other potential restructuring avenues available to the debtor company, should investigate whether there are any options to purchase registered on title or otherwise as that may affect the viability of the potential restructuring.
The negative impact of an option to purchase land on a debtor company’s ability to restructure was borne out in the case of CIM Bayview. The company and proposal trustee determined that there was no potential for CIM Bayview to file a viable proposal in light of the decision on the Bryton Group’s option, and a deemed bankruptcy was expected to occur.
It appears that this may not be the last word on the issue, as the decision has been appealed to the Ontario Court of Appeal. It remains to be seen whether the creditors of CIM Bayview will direct the trustee to continue the appeal.