Present: La Forest,
Sopinka, Gonthier, Cory, McLachlin, Iacobucci and Major JJ.
on appeal from the court of appeal for
nova scotia
Conditional sales ‑‑
Leases ‑‑ Options to purchase ‑‑ Lessee having option
to purchase helicopters for reasonable fair market value at end of lease ‑‑
Leases not registered under Conditional Sales Act ‑‑ Secured
creditor appointing receiver for property after lessee defaulted on loan ‑‑
Lessor claiming right to possession of helicopters pursuant to leases ‑‑
Whether leases conditional sales ‑‑ Whether leases had to be
registered under Act ‑‑ Conditional Sales Act, R.S.N.S. 1989,
c. 84, s. 2(1)(b)(ii).
Pegasus leased two
helicopters from Mitsui under two lease agreements. Under the leases it had
the option to purchase the helicopters for reasonable fair market value on the
expiry of the lease or any renewal thereof if it was in compliance with all its
lease obligations. It had to give the lessor at least 120 days' notice in
writing if it wished to exercise the option, and then would have 30 days
in which to agree to the reasonable fair market value price as established by
the lessor. The leases were not registered under the Conditional Sales Act.
Under s. 2(1)(b)(ii) of the Act "conditional sale" means
"any contract for the hiring of goods by which it is agreed that the hirer
shall become, or have the option of becoming, the owner of the goods upon full
compliance with the terms of the contract". When Pegasus defaulted on
bank loans secured by a fixed and floating charge debenture, the bank appointed
a receiver for the property. Mitsui, seeking priority, applied for a
declaration that the leases were not conditional sales contracts and that it
was entitled to possession of the helicopters pursuant to them. The chambers
judge held the leases to be conditional sales contracts that had to be
registered under the Conditional Sales Act and dismissed the
application. The Court of Appeal by a majority judgment reversed this
decision.
Held: The appeal should be
allowed.
All leases
containing an option to purchase fall within the scope of s. 2(1)(b)(ii)
of the Conditional Sales Act. The Act applies not only to options which
are to be exercised for a nominal sum, but also to options which are to be
exercised at the fair market value of the leased goods. The leases in this
case fall within the scope of s. 2(1)(b)(ii) of the Act, provided the
purchase option they contain is truly an "option". The purchase
option is not a right of pre‑emption, or right of first refusal. The
terms of the clause gave the lessee on signing the leases the unilateral right
to compel the lessor to sell. The two‑step process whereby the lessee is
to give the lessor notice at least 120 days prior to the expiry of the lease or
lease renewal and again after the lessor values the helicopters does not fail
to qualify as an option. The giving of the initial notice and the valuation of
the helicopters are conditions precedent to the exercise of the option. The
option could only be exercised by the lessee giving its written assent to the
valuation performed by the lessor pursuant to the terms of the clause.
The conditions
contained in the purchase option clause are simply conditions precedent to the
exercise of the option, and not conditions precedent to the option per se.
The parties had previously agreed that the option exercise price was to be the
"reasonable fair market value" of the helicopters, which is not
uncertain. The price is not subject to further negotiation, and is not an
"agreement to agree". The law recognizes that agreements to purchase
property in the future at a "reasonable price" or at "fair
market value" are valid and enforceable. In appropriate circumstances,
the courts will find an implied promise by one party to take steps to bring
about the event constituting the condition precedent. The lessor here would be
under a duty to act in good faith to take all reasonable steps to complete the
valuation in order to allow the option to be exercised if the lessee chose.
Each of the leases
in this appeal contains an option to purchase at fair market value and falls
within the scope of the Conditional Sales Act. Since the lessor failed
to register these leases as required by the Act, its reservation of title is
void against the appellants.
Cases Cited
Approved: Ramsey v. Pioneer Machinery Co.
(1981), 37 C.B.R. (N.S.) 193; Re Nishi Industries (1978), 28 C.B.R.
(N.S.) 261; referred to: Mason v. Lindsay (1902), 4 O.L.R. 365; Canadian
Long Island Petroleums Ltd. v. Irving Industries (Irving Wire Products
Division) Ltd., [1975] 2 S.C.R. 715; Sudbrook Trading Estate Ltd. v.
Eggleton, [1983] 1 A.C. 444; Roots v. Carey (1914), 49 S.C.R. 211; Shackleton
v. Hayes, [1954] 4 D.L.R. 81; Talbot v. Talbot, [1968] 1 Ch. 1; Empress
Towers Ltd. v. Bank of Nova Scotia (1990), 73 D.L.R. (4th) 400; Dynamic
Transport Ltd. v. O.K. Detailing Ltd., [1978] 2 S.C.R. 1072.
Statutes and
Regulations Cited
Conditional Sales Act, R.S.N.S. 1989, c. 84, s. 2(1)(b)(ii).
Instalment
Payment Contracts Act,
R.S.N.S. 1989, c. 230.
Authors Cited
Conference of Commissioners on Uniformity of
Legislation in Canada (1921), 6 Proceedings of the Canadian Bar Association
338.
Cuming,
R. C. C. "True Leases and Security Leases under Canadian
Personal Property Security Acts" (1983), 7 Can. Bus. L.J. 251.
La Forest,
G. V. "Filing under the Conditional Sales Act: Is It Notice to
Subsequent Purchasers?" (1958), 36 Can. Bar Rev. 387.
Perell,
Paul M. "Options, Rights of Repurchase and Rights of First Refusal
as Contracts and as Interests in Land" (1991), 70 Can. Bar Rev. 1.
Ziegel,
Jacob S. "Uniformity of Legislation in Canada: The Conditional
Sales Experience" (1961), 39 Can. Bar Rev. 165.
APPEAL from a
judgment of the Nova Scotia Court of Appeal (1993), 108 D.L.R. (4th) 342, 22
C.B.R. (3d) 95, 125 N.S.R. (2d) 297, 349 A.P.R. 297, reversing a decision of
Cacchione J. dismissing the respondent's application for a declaration
that certain leases were not conditional sales contracts. Appeal allowed.
Edward A.
Gores and Paul C.
Martin, for the appellants.
George W.
MacDonald, Q.C.,
and Harvey L. Morrison, for the respondent.
//Major J.//
The judgment of the
Court was delivered by
Major
J. --
I. Facts
I. The appellants are respectively
the secured creditor, receiver and trustee in bankruptcy of Pegasus Helicopters
Incorporated ("Pegasus"), which leased two helicopters from the
respondent Mitsui & Co. (Canada) Ltd. ("Mitsui") under two lease
agreements ("leases") dated May 26, 1992.
II. Under clause 9 of the leases, the
lessee did not acquire any right or title to the aircraft except the right to
use them in accordance with the terms of the lease. Clause 32 gave the lessee
the option to purchase the helicopters for reasonable fair market value. It
provided:
PURCHASE
OPTION
Lessee,
if in compliance with all of its Lease obligations as to any helicopter, shall
have the option to purchase said helicopter in its then condition, on the
expiration of the term or any renewal under this lease agreement. Exercise of
this option shall be by notification to Lessor in writing at least one hundred and
twenty (120) days prior to the lease (or lease extension) expiration or this
option shall cease. If this option is exercised, the purchase price shall be
the reasonable fair market value of the helicopter as established by Lessor.
In the event Lessee does not agree to such established price in writing within
thirty (30) days of such notification, this option shall cease and neither
party shall have any further obligation under this Section.
III. The leases were not registered
under the Conditional Sales Act, R.S.N.S. 1989, c. 84, and the
respondent was not registered under the Instalment Payment Contracts Act,
R.S.N.S. 1989, c. 230.
IV. The appellant Royal Bank is the
holder of a fixed and floating charge debenture given by Pegasus to secure
loans made by the Bank to Pegasus. Pegasus defaulted on the loans and the
Royal Bank pursuant to the debenture appointed Doane Raymond Limited receiver
of the property.
V. The respondent, seeking priority,
made an application for a declaration that the leases were not conditional
sales contracts under the Conditional Sales Act and that it was entitled
to possession of the helicopters in accordance with the provisions of the leases.
The chambers judge held the leases to be conditional sales contracts that had
to be registered under the Act and dismissed the application. The Court of
Appeal by a majority judgment disagreed and held that the agreements were true
leases and not conditional sales contracts: (1993), 108 D.L.R. (4th) 342, 22
C.B.R. (3d) 95, 125 N.S.R. (2d) 297, 349 A.P.R. 297.
II. Legislation
Conditional Sales Act
2 (1)In this Act,
...
(b)
"conditional sale" means
(i)
any contract for the sale of goods under which possession is or is to be
delivered to the buyer and the property in the goods is to vest in him at a
subsequent time upon payment of the whole or part of the price or the
performance of any other condition, or
(ii)
any contract for the hiring of goods by which it is agreed that the hirer shall
become, or have the option of becoming, the owner of the goods upon full
compliance with the terms of the contract;
III. Judgments
Supreme Court of Nova Scotia
VI. The chambers judge held that the
leases gave Pegasus the option of becoming the owner of the helicopters at the
expiration of the lease term. The terms of clause 32 gave the lessee the
unilateral right to compel the lessor to sell, and hence gave the lessee the
option of becoming the owner. He declared the two leases were conditional
sales contracts within the meaning of both the Conditional Sales Act and
the Instalment Payment Contracts Act, and dismissed the respondent's
application.
Nova Scotia Court of Appeal
Freeman J.A. for
the majority
VII. Freeman J.A. held that upon
fulfilling all of the obligations under the leases, it was not intended that
Pegasus become the owner of the helicopters automatically or for nominal
consideration. The respondent remained the owner of the helicopters
throughout. Pegasus simply had the right to require the respondent to
establish a reasonable fair market value at which it was prepared to sell the helicopters.
Pegasus was at liberty to reject that price. There was no mechanism for
determining a price binding on both parties. He held that the overriding
intention of the parties was to create a lease and not a contract of
conditional sale. Clause 32 created a right of pre-emption which was not the
kind of arrangement that the legislature intended to be covered by s.
2(1)(b)(ii) of the Act. The respondent was entitled to the helicopters free of
any claims of the appellants.
Jones J.A.
(dissenting)
VIII. Jones J.A. held that s. 2(1)(b)(ii)
of the Act applied to leases containing an option to purchase. The leases
contained an option to purchase because clause 32 gave the lessee the
unilateral right to compel the lessor to sell. It was open to the parties to
set the terms by which the price would be fixed, and the courts would enforce
the "fair market value" provision contained in clause 32.
IV. Issue
1.Whether
the leases are conditional sales agreements as that term is defined in s.
2(1)(b)(ii) of the Conditional Sales Act.
V. Analysis
Introduction
IX. This appeal raises the
interpretation of s. 2(1)(b)(ii) of the Conditional Sales Act, which
defines a "conditional sale" for the purposes of the Act. Whether
the leases fall within the scope of that definition is the issue in dispute. If
the leases are conditional sale agreements under the definition in the Act,
then the respondent loses its priority because of its failure to register.
Conversely if the leases are leases only then the respondent is entitled to
possession and priority. Two questions arise: does a lease with an option to
purchase at fair market value fall within the ambit of s. 2(1)(b)(ii) the Act;
and is clause 32 a true option?
The Conditional Sales Act
X. A conditional sale agreement is a
contract where the parties agree that while the purchaser takes possession, the
title will not pass until the purchase price has been paid. In order to
protect its title, the vendor must register the conditional sale agreement in a
public registry within the prescribed time.
XI. In Canada, the Conference of
Commissioners on Uniformity of Legislation adopted a uniform Conditional
Sales Act in 1922. Nova Scotia adopted this Act in 1930. The registration
requirements in the Act were intended to protect third parties from being
"misled into dealing with the goods or ... extend[ing] credit to the
conditional buyer on the strength of his ostensible ownership, by requiring
registration of the agreement" (Jacob S. Ziegel, "Uniformity of
Legislation in Canada: The Conditional Sales Experience" (1961), 39 Can.
Bar Rev. 165, at p. 207). The effect of the Act was that unregistered
agreements which reserved title in the vendor were void against subsequent purchasers,
mortgagees and certain creditors (G.V. La Forest, "Filing under the
Conditional Sales Act: Is It Notice to Subsequent Purchasers?" (1958), 36
Can. Bar Rev. 387, at p. 396).
XII. The Act by its terms is applicable
to leases which contain an option to purchase. This is different from the more
modern Personal Property Security legislation currently enacted in many of the
provinces. That legislation is based on Article 9 of the American Uniform
Commercial Code, and deals with concepts such as "security interest"
and "security agreement" which are foreign to the Conditional
Sales Act. The issue of whether a lease is intended by way of security or
whether it is in substance a security agreement arises under Personal Property
Security legislation. Cases decided under Personal Property Security
legislation have no application to the case at bar as this appeal turns on the
provisions of the somewhat antiquated Conditional Sales Act.
The Scope of the Conditional Sales Act
XIII. There are three types of agreements
which fall within the scope of s. 2(1)(b) of the Act. The first are
"true" conditional sales agreements, where the purchaser agrees to
pay the vendor instalments over a period of time, and the vendor retains title
until all such payments have been made. It is clear from the outset that
unless the purchaser defaults, title will be transferred to the purchaser at
the end of the term.
XIV. The second type of agreement covered
by the Act is a lease-option agreement, where the option is for nominal
consideration; it is plain from the terms of the lease that the option will be
exercised, and that the "lease" payments are in reality going to pay
for the goods. When this type of lease-option agreement is initially executed,
the parties intend that the goods will be transferred to the
"lessee". These agreements have been referred to as disguised
conditional sales agreements and fall within the scope of the Act.
XV. It appears that the inclusion of the
lease-option agreement within s. 2(1)(b)(ii) was an express attempt by the
Commissioners drafting the Uniform Conditional Sales Act to ensure that
disguised conditional sales contracts were covered by the Act. The
Commissioners, in drafting the Uniform Act, intended to reverse the effect of
earlier decisions such as Mason v. Lindsay (1902), 4 O.L.R. 365 (Div.
Ct.), which held that the Act could not apply to a lease where the lessee
merely had the option of becoming the owner, but where he was not legally
obliged to do so, even though the parties may well have intended that the
"lessee" become the eventual owner at the end of the
"lease". The broad definition of "conditional sale" in s.
2(1)(b)(ii) of the Act ensures that parties cannot avoid the registration
requirements simply by changing the form of the conditional sales contract to
look like a lease.
XVI. The third type of agreement covered
by the Act is a "true" lease-option agreement. This type of
agreement is not a disguised conditional sales contract. The rental payments
are made strictly for the use of the goods rather than being instalment
payments towards the eventual purchase of the leased goods. The option amount
at the end of the lease is for fair market value, and not for some nominal sum.
XVII. The leases in the present case fall
within the third category, which the majority in the Court of Appeal held did
not fall within the scope of the Act.
XVIII. The wording and history of the Act
demonstrate that any lease containing an option to purchase falls within
the scope of s. 2(1)(b)(ii) of the Act. The Act itself does not make any
distinctions between options that are to be exercised at a nominal amount and
those that are to be exercised at fair market value. All leases containing an
option to purchase fall within the scope of the Act. This conclusion is
bolstered by looking at the history of the section. The original version of s.
2(1)(b) provided, in part:
...
any contract for the hiring of goods by which the hirer contracts to pay as
compensation a sum substantially equivalent to the value of the goods, and
by which it is agreed that the hirer shall become, or have the option of
becoming, the owner of the goods upon full compliance with the terms of the
contract; [Emphasis added.]
(Conference
of Commissioners on Uniformity of Legislation in Canada (1921), 6 Proceedings
of the Canadian Bar Association 338.)
This was not the final version because
the Commissioners deleted the underlined words, thereby declining to follow the
American model, and confirming that the Act was intended to apply to all
lease-option agreements, and not just those which were disguised conditional
sales contracts. This interpretation is supported by the commentary of R. C.
C. Cuming in "True Leases and Security Leases under Canadian Personal
Property Security Acts" (1983), 7 Can. Bus. L.J. 251. Professor
Cuming noted that the drafters of the conditional sales legislation faced the
challenge of characterizing leases. The drafters included in the legislation a
"detailed description of those leases which were to be treated as
conditional sales contracts for the purposes of the legislation" (p.
259). He explained the effect of s. 2(1)(b)(ii) of the Act as follows at
p. 260:
Accordingly,
all leases with purchase options were deemed conditional sales contracts. All
leases without options and without provisions for vesting ownership in the
lessee were outside the scope of the Act.
It
is clear that the drafters of this legislation were not employing a purely conceptual
approach when determining what types of leases were to be regulated by
conditional sales legislation. A lease under which the lessee, without more,
becomes the owner of the chattels upon compliance with the terms of the
contract is, no doubt, universally recognized as a sales transaction. But, the
definition also includes all leases containing purchase option clauses, even
those leases under which the option to purchase involves payment of a sum of
money which is equal to or greater than the market value of the goods. There
is no basis in the common law of bailment or in business practice for the
conclusion that all leases with purchase options should be treated as
instalment sales contracts. One may speculate that the definition was designed
primarily to ensure that some of the more commonly encountered leases are
registered in a central registry.
Professor Cuming correctly noted that
the Act did not differentiate on the basis of an "economic reality"
test. That is, the mere presence of a purchase option in a lease was
conclusive: any lease with an option would fall within the definition of a
"conditional sale" even though in economic terms it was merely a
lease. The result is that the Act applies to all lease-option agreements, including
agreements which specify that the option is to be exercised at fair market
value.
Option to Purchase at Fair Market
Value
XIX. The conclusion that the Act applies
to the leases in this appeal is supported by Canadian jurisprudence. In Ramsey
v. Pioneer Machinery Co. (1981), 37 C.B.R. (N.S.) 193 (Alta. C.A.), the
bankrupt had concurrently executed a lease and an option agreement covering
certain equipment. The lease and option agreements were not registered in
accordance with the provisions of the Conditional Sales Act. (The
Alberta Act did not contain the same wording as the Nova Scotia Act, but the
import and effect of the legislation are the same.) The option provided that
if the lessee performed the terms of the lease, it would have the option of
continuing to rent the equipment, or purchasing it for $9,000, which was the
forecasted fair market value at the expiry of the lease.
XX. Stevenson J.A. recognized that there
were different types of agreements which could be covered under the Act. These
included the typical conditional sales contract which binds the purchaser to
buy, but the Act could also cover lease-option agreements, which were often
conditional sales contracts in disguise. However, he found that the
lease-option agreement in question was not a disguised conditional sales
contract because it was not necessarily intended by the parties that the option
would be exercised. He held that the Act applied even though it was not
intended that the lessee would be bound to purchase the equipment under the
lease-option agreement. The Act did not exclude a lease where the lessee had
it within his power to acquire ownership; it only excluded pure leases. Thus a
lease-option agreement where the option could be exercised at fair market value
was held to fall within the ambit of the Act. In the result the
lessor-optionor lost his right to priority for failure to register the
agreement.
XXI. A similar approach was adopted by the
British Columbia Court of Appeal in Re Nishi Industries (1978),
28 C.B.R. (N.S.) 261. There, the appellant (Canadian Acceptance Corporation)
had leased two forklift trucks to Nishi Industries. The leases included a right
to purchase the equipment at the end of the term for its fair market value.
That fair market value could not be less than 25 percent of the original
purchase price that the lessor had to pay for the forklift trucks. Hence Nishi
had the option of becoming the owner of the trucks upon payment of the fair
market value for the trucks, which was anticipated to be a substantial sum of
money. The Court of Appeal recognized that the wide definition of
"conditional sale" is sufficient to transform a chattel lease into a
conditional sales contract. As long as the lessee had the option of becoming
the owner, the lease-option agreement fell within the ambit of the Act. In Re
Nishi, it was found that the lessee had the option of becoming the owner
upon executing the lease. Hence, the agreement was a conditional sales
contract even though the option was to be exercised at fair market value. The
appellant lost the right to repossess the trucks for failure to register the
agreements.
XXII. In my opinion these cases were decided
correctly and lead to the conclusion that the Act was intended to encompass all
lease agreements where the lessee-optionee is given the option of becoming the
owner of the leased goods. The Act applies not only to options which are to be
exercised for a nominal sum, but also to options which are to be exercised at
the fair market value of the leased goods. The leases here fall within the
scope of s. 2(1)(b)(ii) of the Act, provided the option in clause 32 is truly
an "option".
Options and Rights of Pre-emption
XXIII. The meaning of an option to purchase was
considered in Canadian Long Island Petroleums Ltd. v. Irving Industries
(Irving Wire Products Division) Ltd., [1975] 2 S.C.R. 715, per
Martland J. at pp. 731-32:
An
option gives to the optionee, at the time it is granted, a right, which he may
exercise in the future, to compel the optionor to convey to him the optioned
property....
In
other words, the essence of an option to purchase is that, forthwith upon the
granting of the option, the optionee upon the occurrence of certain events
solely within his control can compel a conveyance of the property to him.
In that case, it was held that the
agreement in question created a right of pre-emption and not an option to
purchase. The difference between an option and a right of pre-emption is that
an option gives the optionee the unilateral right to exercise the option and
thereby require the optionor to sell the subject-matter of the option upon
pre-arranged terms. A right of pre-emption, or right of first refusal, does
not give the grantee the unilateral power to compel the grantor to sell the
property in question. Instead, the grantor has the sole power to decide
whether to make an offer. It is only at that point that the grantee (or
lessee) is given the opportunity of purchasing the property. A right of first
refusal is a commitment by the grantor to give the grantee the first chance to
purchase should the grantor decide to sell.
XXIV. Clause 32 is not a right of first
refusal, or right of pre-emption. The respondent did not have the right to
decide whether or not it was going to give Pegasus the first chance to purchase
the helicopters. The choice was with Pegasus, by virtue of the leases, to
decide whether it wished to purchase the helicopters. It alone had the ability
to compel the sale of the helicopters. As stated by the Chambers judge, the
terms of clause 32 gave the lessee on signing the leases the unilateral right
to compel the lessor to sell. I respectfully cannot agree with the Court of
Appeal's conclusion that clause 32 was merely a right of pre-emption.
XXV. The respondent argued that the wording
of clause 32 is such that the lessee appears to be obligated to
"exercise" its option twice: once upon giving notice at least 120
days prior to the expiration of the lease or lease renewal, and once again
after the respondent values the helicopters. Since an option is intended to
provide an exclusive period for acceptance of a definite offer, the two-step
process, it is argued, on its face fails to qualify as an option. I disagree.
XXVI. Paul M. Perell, in "Options, Rights
of Repurchase and Rights of First Refusal as Contracts and as Interests in
Land" (1991), 70 Can. Bar Rev. 1, at p. 3, lists the three
principal features of an option, all of which are present in clause 32:
1.exclusivity
and irrevocability of the offer to sell within the time period specified in the
option;
2.specification
of how the contract of sale may be created by the option holder; and
3.obligation
of the parties to enter into a contract of sale if the option is exercised.
XXVII. An option contract is an antecedent
contract because it precedes the contract of purchase and sale that will result
if the opportunity provided by the option is "seized upon" or
exercised. Once an option is exercised, the parties discharge their
obligations under the option contract by entering into the contract of purchase
and sale. The exercise of an option is the election to buy property on the
terms specified in the option agreement, and is the equivalent of accepting the
irrevocable offer made in the option. One cannot exercise the same option
twice. The exercise of the option must mean the acceptance of the offer. That
acceptance must be unconditional, must only be made once, and must be made in accordance
with the terms of the option.
Characterization of the Option in
Clause 32
XXVIII. The exercise of an option must lead to a
binding contract of purchase and sale. The mechanism of converting an option
to purchase into a contract of purchase and sale has been described by Lord
Diplock in Sudbrook Trading Estate Ltd. v. Eggleton, [1983] 1 A.C. 444
(H.L.), at pp. 476-77:
The
option clause cannot be classified as a mere "agreement to make an
agreement." There are not any terms left to be agreed between the
parties. In modern terminology, it is to be classified as a unilateral or
"if" contract. Although it creates from the outset a right on the
part of the lessees, which they will be entitled, but not bound, to exercise
against the lessors at a future date, it does not give rise to any legal
obligations on the part of either party unless and until the lessees give
notice in writing to the lessors, within the stipulated period, of their desire
to purchase the freehold reversion to the lease. The giving of such notice,
however, converts the "if" contract into a synallagmatic or bilateral
contract, which creates mutual legal rights and obligations on the part of both
lessors and lessees.
The "giving of notice" in Sudbrook
Trading was all that was required to exercise the option. Once the option
was exercised, no further notice or consent was needed, as a fully enforceable
contract of purchase and sale arose. To draw the analogy to the case on
appeal, an enforceable contract of purchase and sale would have been concluded
upon the lessee exercising its option (i.e. accepting the offer) within 30 days
of the lessor performing its valuation of the helicopters as required under
clause 32. The giving of the initial notice at least 120 days prior to the
expiry of the lease or lease renewal could not qualify as an
"exercise" of the option, regardless of the wording used in clause 32
itself. If Pegasus wanted to exercise its option, it could only have done so after
the respondent had determined the "reasonable fair market value" of
the helicopters. Hence the giving of the initial notice and the valuation of
the helicopters are conditions precedent to the exercise of the option. The
option could only be exercised by the lessee giving its written assent to the
valuation performed by the lessor pursuant to the terms of clause 32.
XXIX. This conclusion is consistent with
earlier decisions of this Court. In Roots v. Carey (1914), 49 S.C.R.
211, Duff J. explained that an acceptance of the offer in an option (i.e. the
exercise of an option), in order to be effective, must be an unconditional
acceptance in the sense that the offeree must declare his "present
intention" to enter into a contract with the offeror on the terms of the
offer. In the present case, the giving of the initial notice could not
constitute the acceptance of the offer because the lessee, in giving notice,
would not be entering into a binding contract of purchase and sale. A mere indication
of a potential willingness to accept an offer, but not an unconditional
acceptance of an offer, cannot amount to the exercise of an option so as to
create a binding contract of purchase and sale (Shackleton v. Hayes,
[1954] 4 D.L.R. 81 (S.C.C.), at p. 90 per Cartwright J.). All that the
lessee would be doing by giving the initial notice is expressing an interest in
buying the helicopters. That cannot constitute an acceptance and hence cannot
be an "exercise" of the option.
Conditions Precedent to the Exercise
of the Option
XXX. Clause 32 is an option to purchase
subject to three conditions precedent. First, in order to be able to exercise
its option, the lessee must be in compliance with all of its lease obligations.
Second, the lessee must give the lessor notice in writing at least 120 days
prior to the expiry of the lease or a renewal thereof. Third, the lessor
becomes obligated, at that point, to perform a valuation of the helicopter in
order to determine its reasonable fair market value. This is not an offer that
is to be made by the lessor to the lessee. It is a contractual obligation
undertaken by the lessor to determine the reasonable fair market value of the
helicopter at the time the initial notice is given by the lessee. These three
conditions are simply conditions precedent to the exercise of the option; they
are not conditions precedent to the option per se (Re Nishi,
supra, at p. 264).
XXXI. The parties had previously agreed that
the option exercise price was to be the "reasonable fair market
value" of the helicopters. That price is not uncertain. It is not
subject to further negotiation; it is not an "agreement to agree".
The price has been set to be the reasonable fair market value. As noted by the
British Columbia Court of Appeal in Re Nishi, an option to purchase at
"fair market value" is enforceable. This is not a situation where
the price or some other material term of the option has yet to be agreed upon.
The law recognizes that agreements to purchase property in the future at a
"reasonable price" or at "fair market value" are valid and
enforceable.
XXXII. In Talbot v. Talbot, [1968] 1 Ch.
1 (C.A.), a testator gave two of his sons the option of purchasing the farm on
which they lived together "at a reasonable valuation". There was no
provision in the will for the mode of valuation. However, the court held that
it would itself undertake the task of valuation and direct a special inquiry as
to what is a reasonable price for the farm. An option to purchase at a
"fair valuation" or at a "fair price" is an option which
the courts will enforce. Similarly, in Sudbrook Trading, supra,
the House of Lords held that an option contained in a lease to sell land at a
price to be fixed by valuers was enforceable, and that the lessee's rights
could not be defeated by the lessor's refusal to appoint a valuer. The House
of Lords construed this option as an option to sell at fair market value; the
court could itself direct that the fair market value be established and order
specific performance. An agreement to sell at fair market value is valid and
enforceable. The enforceability of options at fair market value was recognized
by the majority of the court in Empress Towers Ltd. v. Bank of Nova Scotia
(1990), 73 D.L.R. (4th) 400 (B.C.C.A.). That case involved a commercial
tenancy with an option to renew. In the course of his reasons, Lambert J.A.
said that if an agreement provides that a tenant can renew at the market rental
prevailing at the commencement of the renewal term, such an agreement can be
enforced. The market rental can be determined on the basis of valuation and,
if necessary, a court can determine the prevailing market rents, since this is an
objective matter capable of discernment. An option to be exercised at
"fair market value" is valid and enforceable.
XXXIII. The duty to act in good faith to comply
with stipulated conditions precedent was recognized in Dynamic Transport
Ltd. v. O.K. Detailing Ltd., [1978] 2 S.C.R. 1072. Dickson J. (as he then
was), speaking for the Court, noted that the existence of a condition precedent
does not necessarily preclude the existence of a binding agreement. Certain
obligations to be performed under the contract may not be due unless and until
the condition precedent is fulfilled. Thus, obligations are held "in
suspense" pending the occurrence of the event constituting the condition
precedent. Applying this reasoning, the lessee's right to exercise its option
would be held "in suspense" until the lessor properly performed its
valuation.
XXXIV. In Dynamic Transport, supra,
Dickson J. also recognized that in appropriate circumstances, the courts will find
an implied promise by one party to take steps to bring about the event
constituting the condition precedent. This would involve the party upon whom
the obligation rests to use its best efforts to fulfil the condition
precedent. The lessor here would be under a duty to act in good faith to take
all reasonable steps to complete the valuation in order to allow the option to
be exercised if the lessee chose. Clearly, the lessor is not in a position, by
virtue of clause 32, to make any offer that it may feel is appropriate. It is
contractually bound to act in good faith to determine the reasonable fair
market value of the helicopters, which is the price that the parties had
initially agreed would be the exercise price of the option. As clause 32 gives
the lessee the unilateral right to compel the lessor to sell the helicopters at
their reasonable fair market value, it is an option. The fact that it is
subject to conditions precedent does not alter its nature.
XXXV. Each of the leases in this appeal contains
an option to purchase at fair market value. The leases fall within the scope
of s. 2(1)(b)(ii) of the Act. The respondent failed to register these leases
as required by the Act and consequently its reservation of title is void
against the appellants.
XXXVI. The appeal is allowed with costs
throughout.