Legal Blog

Dead Deal

“Does the obligation of good faith in contracting mean that everything must be flexible, and that a fixed closing date is really an approximate closing date?” This question was posed and answered in 2336574 Ontario Inc. v. 1559586 Ontario Inc. 2016 ONSC 2467 (SCJ).

Deal

Corporate parties entered into an agreement of purchase and sale for a commercial condominium. The $640,000 transaction called for payments of four $10,000 deposits over six months, $32,000 on the interim occupancy closing, and the balance of $568,000 on final closing. The agreement allowed the vendor to set the closing date, but the outside closing date was July 8, 2015. On May 21, 2015, the vendor set the final closing date to be June 26, 2015.

The purchaser immediately, and without explanation, requested an extension to September 1, 2015. The vendor immediately, and without explanation, refused to grant the extension. Later, the purchaser’s principal reduced the requested extension to July 8, 2015 and explained that he needed the extension because he had been travelling. The vendor then learned from its real estate agent that the purchaser’s real reason for the extension request arose out of problems with financing. The vendor refused the extension.

Closing

On the day of closing, the vendor’s lawyer sent the closing package to the purchaser’s lawyer, but was advised at 4:30 p.m. that the purchaser’s lawyer had left the office for the day. The vendor’s lawyer immediately wrote to confirm the purchaser’s breach of the agreement.

The next business day, the purchaser’s lawyer confirmed that the purchaser would be in funds the following day and requested direct deposit information. The vendor’s lawyer did not respond to this request.

The purchaser registered a caution and brought an action for specific performance and a motion for a certificate of pending litigation. The vendor requested a declaration that the agreement was at an end and that the purchaser had forfeited its deposit, which the vendor claimed was the full $72,000.

Good Faith

Both parties relied on Bhasin v. Hrynew [2014] 3 SCR 494, each arguing that the other did not act in good faith. Bhasin explained that there was already a general duty of good faith in contractual performance recognised in specific situations: franchise, construction, employment, use of discretion, etc. Bhasin then recognised that there was “an organising principle of good faith” (which includes the previously listed duties) and added another category to that organising principle: a duty applying to all contractual parties to act honestly in the performance of their contractual obligations. Our case did not involve the dishonesty of either of the parties and, accordingly, the motions judge did not rely on Bhasin.

The judge dealt with the matter based on pre-Bhasin real estate law dealing with good faith in closings. He was not impressed with either party in that regard: “… it does not lie with either side to accuse the other of failing to act in good faith. Both sides played their moves carefully and showed each other only their game face.”

The judge noted that a duty of good faith was already required in contract law, “but it is measured by the specific relationship between the parties …. It very much depends on ‘whether, in the particular context, the conduct would be regarded as commercially unacceptable by reasonable and honest people’. … Where the parties have a long term, ongoing relationship, a level of good faith may be expected that imposes flexibility and obligations beyond the letter of the contract; where they are commercially experienced buyers and sellers in a discreet (sic), one-off transaction, the level of contract adherence would not be expected to vary from the strict contractual terms.”

The judge concluded: “The Vendor’s obligation here was to have the Condominium ready to transfer to the Purchaser and to set the final closing date. The Purchaser’s obligation was to have the closing funds ready on the closing date and to pay them to the Vendor. The Purchaser did not have an obligation to take less than full title or to get title a day or two late; likewise, the Vendor did not have an obligation to take a few less dollars or to take the closing money a few days late. Given the relationship of Vendor and Purchaser in a discreet (sic) real estate deal, good faith meant sticking to the contract, not bending the contract — even just a little bit — to one side’s will.”

Deposits

 The judge held that the purchaser defaulted on its obligations under the agreement, a default that was not a minor technical breach. This default effectively terminated the agreement at a time when the purchaser was not ready, willing, and able to close. The agreement allowed the vendor to retain the deposit money as liquidated damages. Accordingly, the vendor claimed $72,000.

The purchaser argued that its payments were not deposits because they lost their character as deposits upon the interim occupancy closing. The judge did not accept the purchaser’s argument relating to the first four $10,000 payments, particularly because the purchaser’s cheques referred to each one as a deposit. Accordingly, the judge held that the first payments of $40,000 were deposits and were to be dealt with according to the agreement. The judge held that the $32,000 occupancy closing payment was not a deposit; rather, it was a payment towards the balance due on closing and had to be returned because there had been no closing.

Forfeiture

The purchaser claimed that it was entitled to relief from forfeiture, submitting that the deposits were out of proportion to the vendor’s damages and that it would be unconscionable for the vendor to retain the deposits. The judge noted that the Ontario Court of Appeal had held that deposits could be forfeited on a purchaser’s non-closing and that there was nothing out of proportion in the forfeiture of $40,000 in deposits on a $640,000 purchase.

Upshot

 The judge ordered the vendor to repay $32,000 to the purchaser, but allowed the vendor to retain the remaining $40,000. The judge awarded the vendor two-thirds ($10,666) of the vendor’s claimed partial indemnity costs of $16,000. The judge reduced the claimed amount because the vendor was unsuccessful in obtaining the full $72,000 it had demanded.

For those keeping score, the vendor received about $51,000 (i.e. the $40,000 deposit plus $11,000 in costs) and probably paid its own lawyer about $26,000. Given that the real estate market was rising, the $25,000 difference was found money. We expect that the vendor re-sold the property for a sufficiently high price to compensate the vendor for all of its damages arising out of the non-closing, and probably then some.

Conversely, the purchaser lost the difference between the value of the property and the purchase price. It also lost $51,000 and was liable to its own lawyer for about $26,000 in costs, a total of $77,000. Had the purchaser folded its cards when the deal did not close, it would have lost $72,000 plus the increase in value of the condominium. Accordingly, the action gave the purchaser a chance at a home run, but only cost the purchaser about $5,000 to take the chance.

Image courtesy of Seemann.

Written by Jonathan Speigel Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.