Legal Blog

Deposit

All standard agreements of purchase and sale contemplate a deposit being paid upon the execution of the agreement – and perhaps a second deposit at a later date – with the balance being paid on closing of the transaction. The standard agreements, however, do not specify what happens when a contemplated deposit is not paid. Does the vendor have a right to terminate – even when, typically, time is made of the essence of the agreement? As usual, it depends. The analysis of that termination right is set out in Reserve Properties Ltd. v. 2174689 Ontario Inc. (2015) 56 R.P.R. (5th) 133 (Ont SCJ).

History

Shoppers Drug Mart owned the defendant numbered company. The plaintiff developer and Shoppers had a long relationship. As part of that relationship, the developer found a site (the “First Site”) for Shoppers. Shoppers bought the First Site and engaged the developer to develop it. The developer then found another nearby site (the “Second Site”), which Shoppers preferred over the First Site. The parties agreed that Shoppers would enter into a long-term lease of the building to be built on the Second Site. As part of that deal, Shoppers required the developer to buy the First Site. That purchase, for $3.175 million, was to close once Shoppers took possession of the Second Site.

Everything was moving along as planned. However, in the midst of the development of the Second Site, two things happened: (i) Loblaws took over Shoppers and (ii) the developer assigned its rights to buy the undeveloped First Site to Sobeys, a competitor of Loblaws. Loblaws was not pleased.

The agreement of purchase and sale for the First Site required the developer to pay a deposit of $25,000 within 5 days of waiving the conditions in the agreement and an additional $75,000 “contemporaneously upon (Shoppers) taking possession of the premises …” The developer paid the first deposit but, when Shoppers took possession of the Second Site, the developer failed to pay the second deposit as scheduled.

Shoppers did not jump on the default immediately. It also did not warn of the default. Four days after the default, Shoppers terminated the agreement. The developer then tendered payment on the same day.

 

Default

The developer raised all sorts of arguments why its failure to pay the second deposit on time was not really a default. These arguments, and the judge’s responses, are set out below:

• Contemporaneously does not mean immediately; rather, it means approximately and 4 days was approximately. The judge stated that contemporaneously means “occurring at the same time.”
• Shoppers was obliged to give notice of the requirement to pay the second deposit. The judge stated that Shoppers was not so obliged; the agreement did not require it and he would not imply that obligation into the agreement. The agreement was between two sophisticated parties, containing an entire agreement clause; it was not necessary to imply a notice obligation to give business efficacy to the agreement and a disinterested third party would not think it obvious that a notice clause was required.
• Shoppers lulled the developer into complacency. The judge noted that Shoppers said nothing to mislead or sandbag the developer; rather, it merely took advantage of an opportunity that arose when the developer gave it the opening.
• Shoppers did not act in good faith. The judge noted that a breach of the duty of good faith requires active dishonesty. Merely refraining to demand payment of the deposit did not make Shoppers actively dishonest.

Once all of the developer’s arguments were dealt with, the judge noted that, with a time of the essence clause, failure to pay the deposit exactly when due resulted in the developer’s breach of the agreement. But did that breach give Shoppers the right to terminate the agreement?

 

Termination

 The agreement did not specify that Shoppers had a right to terminate the agreement if the developer failed to pay the deposit on time. Accordingly, the judge was left with common law principles to decide that question.

 

An innocent party may terminate a contract if there is a substantial failure of performance by the defaulting party. It has to be a breach that deprives the innocent party of substantially the whole benefit of the contract or evinces an intention on the part of the defaulting party to no longer be bound.

 

The judge analysed the requisite five factors to determine whether future performance should be excused after a breach:

• Ratio of defaulted obligation compared to obligations as a whole

–  A $75,000 deposit was insignificant in comparison to a $3.175 million transaction.

• Seriousness of the breach to the innocent party

– Normally, the failure to pay a deposit would be very significant to the innocent party. However, given the long-time relationship between the parties, there was no real commercial significance of the second deposit to Shoppers

• Likelihood of repetition of the breach

– There was no likelihood of repetition. Had Shoppers wanted to receive the deposit, it would have asked for it and the developer would have paid it.

• Seriousness of the consequences of the breach

– Other than the technical violation of the time of the essence clause, there was no serious consequence of the breach.

• Relationship of the obligation breached to the entire obligation

– The developer had spent millions of dollars developing the Second Site and had already performed the bulk of its bargain over 5 years at great cost and effort. The property being purchased was surplus to the intention of the long-term business transaction and was irrelevant to the parties. The developer was making only a profit of $370,000 on its sale to Sobeys.

Accordingly, the judge held that Shoppers did not have a right to terminate the agreement and its attempt to do so was itself a breach of the agreement.

 

Remedy

The developer wanted a declaration that the agreement was still outstanding and would be enforced. The judge noted that this was the equivalent of asking for a declaration of specific performance. The judge would not do that. The property was certainly not unique; the developer only wanted to purchase the property so that it could flip it for profit.

 

Fortunately, Sobeys could not make any claim against the developer for the developer’s breach of its contract to sell the First Site to Sobeys. The developer, perhaps anticipating an adverse reaction from Loblaws, had wisely inserted a clause in its agreement with Sobeys terminating the agreement if the developer was unable to pass title due to the agreement with Shoppers not being completed.

 

The judge adjourned the matter for a summary hearing to determine damages, including any aspects of mitigation. He also awarded partial indemnity costs in favour of the developer in the amount of $39,000.

 

Unusual

The judge noted that the facts in this case were unusual. In a run-of-the-mill residential real estate transaction, the failure to provide a deposit as scheduled would, we suggest, entitle a vendor to terminate the agreement. A deposit is the very essence of the consideration for a vendor’s obligation to wait many months for the closing of the ultimate transaction. Failure to pay the deposit means that the purchaser is either incapable of closing the transaction or has no real intention of doing so.