Rent-to-purchase agreements

Saturday, October 1st, 2005

Tenants, Landlords must have a clear understanding on option to buy the property


Last month, I discussed the importance of clearly setting out the terms of a rental agreement when a house is being lived in by only one of its owners. The same lesson can be found in a rental agreement where the renters have no present interest in the property, but might later desire to own it themselves. If an agreement is not clear, renters may believe themselves to have an option to purchase the property when in fact they have no right to own the property at all.

A recent case from the Supreme Court of British Columbia dealt with exactly this issue. In the case, one couple approached another and asked to rent their land as a location for their mobile home and three horses. The parties had not met previously, and the couple that eventually became the landlords had not even advertised their property as available to lease. The landlords had purchased the property as an investment for their retirement, and were using it as security for loans for their business. However, it was agreed that the property could be rented by the would-be tenants, and a stan­dard form, month-to-month rental agreement was drawn up and signed by all four individu­als.

Special clauses

Both parties placed additional clauses in the standard form agreement, and there were cer­tain items that the parties were very clear on. For example, clauses were added that allowed the tenants to have horses on the property, pro­hibited the tenants from cutting any trees without the landlords’ permission, and required the landlords to pay the property taxes on the land. These clauses were useful to clarify each party’s respec­tive position.

First rights

However, there was a clause that could have been much clearer and eventually gave rise to the tenants’ claim to an option to purchase the property. The clause simply stated: “purchase price should be midway between ‘fair market value’and tax assessment.” Perhaps to clarify this reference to a “purchase price,” immediately after signing the agreement, the parties also added and initialled the following words to the top right-hand corner of the rental agree­ment: “five-year lease with first refusal to purchase.” One day the tenants sought to enforce their “option to purchase.” However, the landlords didn’t want to sell the land and court action ensued.

The court had to deter-mine whether the tenants did indeed have an option to purchase the property. In prior case law, an option to purchase a property has been defined as “a continuing offer or contract by which the owner stipulates with another that the latter shall have the right to buy property at a fixed price within a certain time.” If an agree­ment to lease a property contains an option to purchase, the tenants can compel the owners to sell the property to them. This is because the option to purchase is an enduring, irrevocable offer to sell the property. However, the court did not agree that in this situation, the facts sup-ported the existence of an option.

There are a number of reasons why the court in this case did not believe the tenants had an option to purchase. The primary reason was that the contract was too vague about the terms of the supposed option. First of all, the agreement did not indicate that the owners had an express intention to sell the property. While there was a clause relat­ing to what the purchase price would be, it did not specify exactly how the payment would be made.

In addition, the contract did not set out a time period over which the option would run. There was no way of knowing whether the option was for the term of the lease or some other period. In fact, the expiration date of the lease was not even specified in the contract! The court found that on the facts, the parties understood the lease would be for five years, but without having clearly stated the relat­ed expiry date of the supposed option, the court could not enforce it.

What must be known

In order for the court to find that an option to purchase exists in a rental agreement, there must be:

·   an intention to sell the property by the owners;

·   an expressed mechanism for the mode of payment;

·   a specific way to determine the price of the property; and

·   a time period during which the option can be exercised.

In this case, the court would not enforce an option to purchase because not all of the above terms were present. Even if one of the forego­ing terms is not in the agreement, a court will likely find the option to purchase too uncertain to be enforceable. In addition, courts will not imply terms of a contract when there is no evidence that such terms have ever been agreed upon.

Technical details

This case highlights that certain technical details must be present in order to acquire legal rights. The tenants should have clarified the terms of the original agreement, and set out an option to purchase, including the factors above, before the contract was signed and payment was made. However, having already signed the rental agree­ment without the option to purchase, the ten-ants could have still acquired the option. One way this could have been done is by making a second contract with the landlords.

In the second contract, the tenants would have had to pay an additional amount for the privi­lege of having the option to purchase the land. It is important to be sure that you want an option to purchase before paying an additional sum in order to obtain it.

The reason for this is because if a person pays money for an option to purchase but then decides not to use it, this person is not entitled to get his or her money back. The money was paid in order to have the ability to use the option regardless of whether it was actually used. In addition, if you are not renting property, but still want an option to purchase a specific piece of land, you can still obtain one.

An option-to-purchase property can be bought from the property’s owner regardless of whether you are an on site on the property.

As the tenants found out, there is no point in trying to create an option to purchase land unless it is done correctly. Failure to understand and include the elements critical to acquiring a legal right will mean that you do not get what you bargained for. If you are interested in obtaining an option-to-purchase property, consult with a lawyer beforehand to ensure you do not end up in the same situation as these tenants.

Don Sihota is a lawyer with Clark Wilson LLP Barristers & Solicitors of Vancouver, providing advice on business acquisitions and sales, cor­porate restructuring and commercial trans-actions. The information in this column should not be construed as legal advice.

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