SASKATCHEWAN VALLEY POTATO CORPORATION APPLICANT(DEFENDANT) - v. -, 2003 SKQB 151

2003 SKQB 151 Q.B.G. A.D. 2002 No. 1670 J.C. S. IN THE QUEEN’S BENCH JUDICIAL CENTRE OF SASKATOON BETWEEN: SASKATCHEWAN VALLEY POTATO CORPORATION APPLICANT(DEFENDANT) - and - BARRICH FARMS

(1994) LTD. RESPONDENT(PLAINTIFF) P.D. Erhardt for Saskatchewan Valley Potato Corporation J.L. Stevens for Barrich Farms

(1994) Ltd. JUDGMENT HUNTER J. April 1, 2003 [ 1 ] Saskatchewan Valley Potato Corporation is the defendant in an action commenced by Barrich Farms

(1994) Ltd. in a statement of claim issued August 26, 2002. Saskatchewan Valley Potato Corporation (hereinafter “SVPC”) applies for the following relief in this motion:

1. An Order pursuant to Sections 107 and 109 of The Land Titles Act, 2000 , directing the Registrar at Information Services Corporation to remove the Caveat, being Interest Register #102889907 (Converted Instrument #02MW04999) from the Adjacent Lands as defined in an agreement between the Respondent (Plaintiff), Barrich Farms

(1994) Ltd. (“Barrich”) and the Applicant (Defendant), Saskatchewan Valley Potato Corporation (“SVPC”) dated December 10, 2001, (hereinafter the “Agreement”); 2.a. An Order pursuant to Rule 173 of the Queen’s Bench Rules of Court striking out paragraphs 15 through 25 of Barrich’s Statement of Claim; and b. A further Order pursuant to Rule 173 of the Queen’s Bench Rules of Court dismissing Barrich’s Statement of Claim as: i. failing to disclose a reasonable cause of action; ii. frivolous or vexatious; and iii. an abuse of the process of the court; OR c.

In the alternative, an Order pursuant to Rule 188 determining a question of law; to wit, whether the Entire Agreement clause in the Agreement is binding and, if so, dismissing the action pursuant to Rule 189; 3. A Declaration that SVPC is not in breach of the Agreement and that the exercise of an Option under the Option Agreement by Island Holdings Ltd. pursuant to such agreement between SVPC and Island Holdings Ltd. may proceed; 4. An Order deeming the consent of Barrich to the Option Agreement between SVPC and Island Holdings Ltd; and 5.

An Order for Costs to the Applicant. [ 2 ] After reviewing the statement of claim and hearing the arguments of counsel, I am not persuaded to strike any paragraphs pursuant to Rule 173, nor to strike the statement of claim based on Rule 173. Further, in my view this is not an appropriate case for a Rule 188 determination. That leaves only the issue of whether Barrich Farms

(1994) Ltd. (hereinafter “Barrich”) can maintain the caveat it had registered in 2002. [ 3 ] By way of background, SVPC and Barrich had an Agreement of Purchase and Sale (hereinafter the “Agreement”) dated December 10, 2001, whereby SVPC agreed to sell lands and improvements to Barrich, being a portion of the SE 21-29-7-W3. Contained within that Agreement was a clause with respect to a “Right of First Refusal” for Barrich in respect of adjacent lands owned by SVPC, namely, SW 22-29-7-W3. The critical clauses in the Agreement relevant to this application follows: 1.1

Definitions . . . ‘Adjacent Lands’ means the lands legally described as the South West Quarter of

Section 22, Township 29, Range 7, West of the Third Meridian, Saskatchewan, including buildings and all other structures and improvements located on, in or under the Lands. . . . ‘Right of First Refusal Price’ means $1,700,000.00 . . . 1.4 Entire Agreement This Agreement constitutes the entire agreement between the parties hereto pertaining to the subject matter hereof and supersedes all prior and contemporaneous agreements, understandings, negotiations and discussions, whether oral or written, of the parties, and there are no warranties, representations or other agreements between the parties in connection with the subject matter hereof, except as specifically set forth herein.

No supplement, modification, waiver or termination of this Agreement shall be binding, unless in writing by the party to be bound thereby. . . . 7.3 Right of First Refusal Provided the Purchaser completes the purchase of the Purchased Assets, it at any time during the Right of First Refusal Term, providing the Purchaser remains the legal and beneficial owner of the Purchased Assets, the Vendor either receives a bona fide cash or cash equivalent offer (the “Offer”) from an arm’s length third party to purchase all or any portion of the Adjacent Lands or wishes to sell, assign, transfer or otherwise dispose of all or any portion of its interest in the Adjacent Lands to an arm’s length third party (the “Offered Interest”) at a price less than or equal to the Right of First Refusal Price, the Vendor shall, forthwith and in any event before entering into any agreement for such sale, assignment, transfer or disposition give notice (the “Notice”) in writing to the Purchaser of its intention to

sell the Adjacent Lands. The Notice shall specify: (

a) the price offered in the Offer or the Offered Interest (taking into consideration the value of any non-cash components) for the Adjacent Lands; (

b) any other terms and conditions of the proposed sale set out in the Offer or the Offered Interest; (

c) the proposed date of the sale, which shall not be less than 30 days after the date the Notice is given to the Purchaser; and (

d) the name of the third party in the Offer and/or the names and addresses of not more than five parties to which the Vendor wishes to be able to sell, assign, transfer otherwise dispose the Offered Interest. The Notice will be deemed to be an offer, irrevocable within the time hereinafter specified for acceptance, by the Vendor to sell the Adjacent Lands to the Purchaser. At any time within 30 days after receipt of the Notice, the Purchaser may give to the Vendor a notice of acceptance indicating that the Purchaser is willing to purchase the Adjacent Lands from the Vendor.

If the Purchaser does not accept the offer set out in the Notice within 30 days after service of the Notice, then the Vendor may sell the Adjacent Lands to the third party specified in the Notice substantially in accordance with the Offer or the Offered Interest as the case may be, on the proposed date of sale set out in the Notice. The Vendor shall not sell the Adjacent Lands to any of the parties whose names do not appear in the Notice nor shall such sale to the third parties be on terms and conditions less favourable to the Vendor than those contained in the Notice.

If the Vendor does not sell the Adjacent Lands to such third party on such date, then the provisions of this Agreement shall once again apply and so on from time to time. 7.4 The Vendor shall not sell, transfer, assign or otherwise dispose of its interest in whole or in

part in the Adjacent Lands during this Right of First Refusal Term, without the consent of the Purchaser, such consent is not to be unreasonably withheld, unless in accordance with

section 7.3. [ 4 ] In April, 2002, SVPC signed an option agreement (hereinafter “Option Agreement”) with a third party. Included as part of that Option Agreement was the purchase of SW 22-29-7-W3, i.e. Adjacent Land within the meaning of the Agreement. [ 5 ] Barrich had registered a caveat dated March 28, 2002, against the SW-22-29-7-W3 and claimed an equitable interest by virtue of the Agreement.

The registration of the caveat does forbid the registration of any transfer or other instrument affecting the land except subject to that caveat. [ 6 ] In August, 2002, SVPC served a notice to lapse the caveat with respect to SW 22-29-7-W3 and in turn Barrich commenced the action. The caveat was continued pursuant to the court order on August 30, 2002, which had been consented to by both parties. [ 7 ] Barrich submits that the Right of First Refusal would be triggered if either of the following occurred, namely: (

a) if at any time during the period defined as the “Right of First Refusal Term”, SVPC received a bona fide cash or cash equivalent offer from an arm’s length third party to purchase all or any portion of the Adjacent Lands for less than $1,700,000, (the “Right of First Refusal Price”); or (

b) SVPC wished to sell, assign, transfer or otherwise dispose of all or any part of its interest in the Adjacent Lands to an arm’s length third party at a price less than or equal to the Right of First Refusal Price. [ 8 ] It is Barrich’s

interpretation of the Agreement that if one of the above events occurred, the Right of First Refusal would be triggered and SVPC would be required to give notice in writing to Barrich of its intention to sell the land before it entered into any other agreements for sale and purchase.

Further, Barrich submits that the notice would be deemed an irrevocable offer by SVPC to sell SW 22- 29-7-W3 for the same price and on the same terms and conditions as the proposed sale and that within 30 days of receipt of the notice Barrich could give a notice of acceptance to SVPC of its intention to purchase these adjacent lands. [ 9 ] Barrich rests its position on what was meant, understood and agreed between Barrich and SVPC, which is not what the words of the Agreement reflect. As stated by counsel in the written submission: 20.

Barrich’s position is that it was understood and agreed by both Barrich ad Sask Valley that the Right of First Refusal Price applied to each of the potato storage buildings on the Adjacent Lands. In other words, it was understood and agreed that Barrich had the

right of first refusal to purchase the Adjacent Lands if Sask Valley received a bona fide offer from an arm’s length party to purchase all or any portion of the Adjacent Lands for less than $1,700,000 per potato storage building or less than $3,400,000 for both potato storage buildings. 21. Harry Meyers dealt directly with Glenn Hornick of Sask Valley during the course of negotiations with Sask Valley to reach the Agreement. Both Harry Meyers and Glenn Hornick well knew what was understood between them to be the Right of First Refusal Price.

In other words, both Harry Meyers and Glenn Hornick were in agreement, at the time the Agreement was committed to paper, that the Right of First Refusal price was $1,700,000 per potato storage building or $3,400,000 for both potato storage buildings. [ 10 ] The Land Titles Act, 2000 , S.S. 2001, c. L-5.1 makes no reference to the word “caveat”.

The relevant provisions of the Act are as follows: 2 (1) . . . (r) ‘instrument’ means any document on which a registration is based; (s) ‘interest’ means any right, interest or estate, whether legal or equitable, in, over or under land recognized at law that is less than title; (t) ‘interest holder’ means a person who is registered in the land titles registry as a holder of an interest; . . . 50

(1) An application for registration of an interest may be submitted only if the interest, at the time of registration, is: (

a) recognized at law as an interest in land; (

b) registrable pursuant to any other Act or any Act of the parliament of Canada; or (

c) designated as a registrable interest in the regulations. . . . 52

(2) Submission of an application for registration of an interest is deemed to be a declaration by the applicant that he or she has the authority to have the interest registered. [ 11 ] Further, it provides that in the Land Titles Regulations that the registrar shall make available to the public a list of the interests that are registrable pursuant to s. 50(1) of the Act.

The published list includes the following: Assignment of Rents Court Order Easement Mutual Easement Non-Mutual Lease – less than 10 years Lease – 10 years or more Miscellaneous Interest Mortgage Mortgage – Annuity Party Wall Agreement Restrictive Covenant – Mutual Restrictive Covenant – Non-Mutual [ 12 ] Barrich acknowledges that a right of first refusal is not mentioned in the published list but submits that it falls into the category of Miscellaneous Interest and as such would be registrable.

[ 13 ] The question is whether or not a right of first refusal creates a registrable interest in land pursuant to The Land Titles Act, 2000 . [ 14 ] In Kopek v. Pyret (1983), 1983 CanLII 2113 (SK KB) , 25 Sask. R. 280 (Sask. Q.B.) , aff’d (1987), 1987 CanLII 4859 (SK CA) , 55 Sask. R. 172 (Sask. C.A.) a right of first refusal is defined as follows: [25] The essential characteristic of a right of first refusal is an intention on the part of the convenantor to give to the convenantee a preference over other potential buyers in the event that the covenantor should decide to sell. . . . [37] . . .

The object of a right of first refusal is to create a preferential right to purchase which may be exercised at some future time when the prospective vendor decides to sell. . . [ 15 ] With respect to whether such a right creates an interest in the land Scheibel J. stated at para. 46: [46] The question of whether a right of first refusal creates an interest in land depends upon the point in time at which the question falls to be considered. Up to the time the subject-matter is offered for sale by the vendor, a right of first refusal is necessarily a mere contractual right.

During that time the party having the right of first refusal is powerless to compel a sale of the subject-matter except upon the concurrence of the vendor to sell. [ 16 ] However, this contractual right is crystallized into an interest in land when the vendor sets forth to sell. Scheibel J. stated at para. 47: [47] However, where the vendor has signified his intention to sell upon certain terms and holds himself ready to sell in the event those terms are met, the position of the preferential purchaser is transformed into that of a virtual optionholder.

By exercising his right of first refusal, he can insist on a sale of the subject-matter to him in preference to all other potential buyers and thereby control the destination of the ownership of the subject-matter.

At this stage in the relations between the parties, the interest of the purchaser becomes transformed into an interest in the land in the same way that an option is presumed to create such an interest. [ 17 ] The Saskatchewan Court of Appeal affirmed Scheibel J’s decision, noting at para. 22 that: [22] The right of first refusal is at its inception a personal right which does not create an interest in land and cannot be protected by caveat by reason of the operation of s. 150 of The Land Titles Act , R.S.S. 1978, c. L-5 , which reads as follows: 150.

Any person claiming to be interested in land may file a caveat with the registrar to the effect that no registration of any transfer or other instrument affecting the land shall be made, and no certificate of title to the land granted, until the caveat has been withdrawn or has lapsed as provided by

section 158, 159, 160 or 161, unless the instrument or certificate of title is expressed to be subject to the claim of the caveator as stated in the caveat. [ 18 ] This position was again clarified in Powers v. Walter (1981), 1981 CanLII 2075 (SK CA) , 124 D.L.R. (3d) 417 (Sask. C.A.) , as set out in the headnote:

(1) The right of first refusal did not initially create an interest in land, but was converted into an option and, hence, an interest in land when L accepted the offer from the respondents. Such a right is caveatable under s. 150 of the Land Titles Act , R.S.S. 1965, c. 115 (now R.S.S. 1978, c. L-5 ), which provides that any person interested in land may file a caveat and that the title may not be dealt with until the caveat has been withdrawn or has lapsed, or unless the title is expressed to be subject thereto.

(2) The caveat in this case only protected the appellant against the respondents to the extent of the term of the lease. Since it failed to describe the right of first refusal, that right was not protected. [ 19 ] Therefore, a right of first refusal is only a contractual right. The right of first refusal does not by itself create an interest in land. When an offer to purchase is made, if it is within the contract, then an option arises. If this is so, then the option to purchase

becomes an equitable interest in land and once that occurs it is a right which is capable of being protected by caveat. [ 20 ] Therefore, in each case it will turn on the specific wording of the language of an option to purchase for the right of first refusal contained in any agreement. In the instant case it is noteworthy that in the Option Agreement between SVPC and the third party, reference is made to the right of first refusal in the agreement between Barrich and SVPC. The clause in the Option Agreement states as follows: 13. . . . (

i) Right of First Refusal — that there are no rights of first refusal, options for purchase or contracts which can in any way supersede this Agreement. It is expressly acknowledged by the Purchaser that there is a Right of First Refusal which has been granted to Barrich Farms

(1994) Ltd. and which expires on March 31, 2005, but which is only effective with respect to an offer to purchase the SW 1/4 22-29-7W3 and improvements thereon for $1,700,000.00 or less; [ 21 ] In the Option Agreement with the third party the total consideration for the assets and land covered by the Agreement, the purchase price is $4,250,000. However, this includes more than just the SW 22-29-7-W3. Located on this adjacent land are two potato storage buildings. The Option Agreement covers the SW 22-29-7-W3 and as well a portion of the SE 21-29-7-W3.

The portion of the purchase price allocated to land is $225,000 but to buildings is $2,775,000 and, in addition, there is an allocation to equipment and chattels of $1,250,000 for the total purchase price of $4,250,000. It is true that it is not possible based on the Option Agreement to delineate the exact amount of the purchase price allocated to the SW 22-29-7-W3. A portion of the SE 21-29-7-W3 is part of the price as are the two potato buildings that exist on the SW 22-29-7-W3.

The price of the building and lands together is approximately $3,000,000 (now amended to $3,500,000), far in excess of the $1,700,000 stated as the Right of First Refusal in the Agreement between SVPC and Barrich. It was not an open-ended nor unencumbered right of first refusal. Forming part of it was a price limitation. [ 22 ] Accordingly, it cannot be said that this right of first refusal crystallized into an offer to purchase within the contract and hence became an equitable interest in land within the meaning of Kopek and Powers, supra .

The Right of First Refusal in the Agreement is a contractual right only and has not changed into an interest in land.

As such, it cannot be protected under The Land Titles Act, 2000 as an interest. [ 23 ] Accordingly, pursuant to s. 109 of The Land Titles Act, 2000 , there will be an order directing the registrar at Information Services Corporation to remove the caveat, being Interest Register #102889907 (Converted Instrument #02MW04999) from the SW 22- 29-7-W3 in the Province of Saskatchewan. [ 24 ] Because much of the focus of the arguments and the briefs of law were with respect to the applications pursuant to Rules 173 and the success of the applicant, SVPC, on only one ground of its motion, there will be no order as to costs.

J.