Can a Contract Containing an Option to Purchase Land be Disclaimed in the Context of an NOI?

When a debtor enters a restructuring process under the Bankruptcy and Insolvency Act (the “BIA”), it is usually does so in order to reduce, extend or otherwise renegotiate its debts and obligations. Frequently, debtors use insolvency proceedings to renegotiate their contractual obligations. Where a counterparty is not willing to renegotiate, debtors can shed themselves of such contract under the BIA.   Pursuant to section 65.13 of the BIA, a debtor who has filed a notice of intention to make a proposal (an “NOI”) may - on notice to the other parties to the agreement and the trustee - disclaim or resiliate any agreement to which the debtor is a party on the day on which the NOI was filed.

On February 12, 2021, Justice Cavanagh considered the types of agreements a debtor can disclaim  In the Matter of the Notice of Intention to Make a Proposal of CIM Bayview Creek Inc.[1]  The main issue before the Court was whether section 65.13 of the BIA allowed the debtor, CIM Bayview Creek Inc. (“CIM”), to disclaim an executory contract containing an option to purchase real property (the “Option Agreement”). In the alternative, CIM asserted that the Option Agreement could be vested out as part of a court approved sale process for CIM’s assets.

The facts of the case are straightforward. Bryton entered into an Option Agreement with CIM, pursuant to which it had an irrevocable option to purchase real property for a specified price. CIM experiencing liquidity issues, filed a notice of intention to make a proposal and issued a disclaimer to Bryton in respect of the Option Agreement. Four days after receiving the disclaimer, Bryton applied under the BIA for an order that the Option Contract could not be disclaimed through the NOI process.

The thrust of Bryton’s argument was the Option Agreement could not be disclaimed as it created an interest in land and was therefore immune from being disclaimed. In contrast, CIM argued the option was, in effect, a contractual right which could be disclaimed in an NOI or alternatively vested out through the sales process.

The Court ultimately sided with Bryton, finding that an option to purchase creates an immediate interest in land which is specifically enforceable. The Court, relying on two recent court of appeal decisions, reasoned that the disclaimer by CIM, if effective, would effectively amount to an expropriation of Bryton’s interest in the real property for which there was no legal foundation to order. As a result, CIM’s disclaimer of the Option Agreement was not effective.

Regarding CIM’s alternative argument, that the option could be vested out in a sales process, the Court rejected this argument as well. The Court reasons that while property rights may be vested out in a sale process, it was inappropriate to do so in the circumstances given the nature of the interest in the property and Bryton’s position that it wouldn’t consent to the vesting out of its interest.

The Court’s decision is consistent with the age-old legal adage that substance prevails over form. Here, although the Option Agreement took the form of a contractual right and contractual rights are subject to being disclaimed, the option, in substance, created a property interest which wasn’t capable of being disclaimed. In essence, the substance of the right prevailed over its form.

If you have any questions about this article, please contact Thomas Lambert.   

[1] 2021 ONSC 220 (CanLII)