Bad Faith Precludes Party From Relying On Non-Compliance with Option Agreement

A family Estate owned a 25-acre property conceptually split into two parts: a main residential portion with four acres, and the remaining 21 acres of farmland.  The property was subject to an Option Agreement, giving the option holder the right to buy parts of the 21-acre farmland on request, and obliging the option holder to pay a proportionate share of the overall property taxes, under what was called the “Realty Tax Sharing Provision” (the “Tax Clause”).  Any default in paying the tax for a period of two full years or more would void the Option Agreement, and with it the right to purchase farmland.

By 2002, purchases by the existing option holder had left the Estate with about 12 acres anchored by the main residential portion. That same year the Estate bought out the option holder’s rights, thus becoming: 1) the owner of the main property; 2) the new option holder; and 3) one of the parties responsible for paying a share of the property taxes. A family member named Fraser took care of paying the property taxes on the Estate’s behalf.

In 2003 a couple named LaPolla bought the 12 acres of farmland that was subject to the option now in the hands of the Estate. When the Estate moved to buy back some land from them, the LaPollas resisted, claiming that the Tax Clause had been breached for failure to pay the Estate’s share of taxes two years in a row. 

The court rejected this argument. It heard evidence that Fraser had repeatedly tried to obtain accurate tax information from the LaPollas, but they were uncooperative.  With no other choice, and mindful of the obligations under the Tax Clause and the Option Agreement, Fraser had simply estimated the Estate’s share of the taxes, and had made annual lump-sum tax payments accordingly.

The court noted that any shortfalls in Fraser’s tax payments over the years never triggered a breach of the Option Agreement, since they never spanned more than the requisite two years’ duration. From 2004 to 2006, for example, Fraser did not actually make any tax payments, but due to his guesswork he had overpaid in the earlier period, so there was a credit balance on file. After 2006 he maintained a credit balance every year, so the account was technically never in arrears. In this scenario, it was simply not a reasonable modern-day commercial interpretation to conclude there had ever been a tax “default” triggering breach.

Moreover, any default or breach were contributed to by the LaPollas themselves, given their failure to cooperate with Fraser on the tax figures. This lack of good faith precluded them from turning to the court for a remedy. See: Lapolla v. The Estate of John Bostock, 2017 ONSC 7448.