In the Clark Auto Body Ltd. v. Integra Custom Collision Ltd. case decided earlier this year, the British Columbia Court of Appeal highlighted the dangers involved in exercising an option.

Clark had an option to renew its lease if it was not in default. The operative term was this

The Tenant may exercise this Option only by giving written notice to the Landlord of its intention to renew not earlier than 9 months nor alter [sic] than 6 months prior to the date of expiration of the Initial Term, provided that there is no outstanding notice of default under Article 8.

A dispute had arisen concerning GST on the gross rent. Clark paid Integra all but $1,285 of the disputed amount, with no explanation as to the difference. Two months after making this payment, Clark sent Integra a notice to renew. Ten days later, Integra sent a notice of default regarding the unpaid disputed amount. Two months after this, Integra sent a notice of termination of the lease. Clark paid the disputed arrears the following day. By that time, the three-month notice window had expired.

The appellate court posed the problem this way: "… is a tenant who is in breach of covenants in a lease, the performance of which are conditions precedent to the exercise of an option to renew the lease, entitled to relief from forfeiture?"

The court ultimately decided in favour of the landlord against the tenant. The court stated that it had to balance its ability to grant relief from forfeiture for the non-observance of the tenant’s covenants in an existing lease against the tenant’s non-compliance with conditions as to its renewal option. It concluded that, in the former case,

a tenant may be permitted to cure its default and be relieved from forfeiture to allow it to retain the balance of the term of the lease. In the latter, there is no compulsion on the tenant to exercise the renewal option, but if it does so, the tenant must comply with the conditions precedent. If the tenant fails to comply, it does not suffer a penalty or forfeiture of an existing tenancy. [The court on an equitable basis] will not intervene.

McCarthy Tétrault Notes:

This decision raises a number of points to consider when exercising an option (aside from the puzzling aspect that no attention appears to have been paid to the fact that no notice of default had been given when the notice of renewal was sent).

First, one should make certain that all of the conditions precedent to the exercise of the option have been satisfied. In this case, it would have been prudent to have paid the $1,285 in question, even if the payment were accompanied by a demand that that amount be sorted out for stated detailed reasons. Then, were the disputed amount in fact owing, it would have already been paid.

Second, the court did not discuss the situation of a bad faith notice of default being given by the landlord. This is probably because it noted that Clark gave no explanation for not paying the $1,285 difference.

Third, options can be extremely valuable assets, and failure to properly exercise an option may bring disastrous consequences. It’s worth considering whether Clark could have validly served another notice to renew within the three-month window if it had paid the disputed difference before the second service of such notice. In this case, payment may have cured and thereby eliminated the notice of default.

Last, it would seem prudent to ensure that option arrangements incorporate provisions whereby either one could verify that all conditions precedent to the exercise had been met or one could cure a default after notice had been given, even if that cure were outside the exercise period.

Post Script

Those of you who are golfers will find the June 2007 decision of the British Columbia Court of Appeal in Matharu v. Nam of interest. The court found that the defendant, who had a 12 handicap, did not have to yell "fore" when his ball went toward some trees adjacent to the tenth tee box. While he planned to shoot over the trees, his ball instead deflected and hit the plaintiff.

The court seemed impressed by the fact that the ball was on its intended line until the defendant lost sight of it, citing the trial judge who found: "This was not a shot that veered off on an unintended course. There was no reason for [the defendant] to call a warning immediately after taking the shot."

However, golf is a three-dimensional game. If the ball does not go high or far enough to clear the trees before sight of it is lost, one would think that the best course of conduct would be to employ one’s maximum lung power.