Legal Blog

Frustration

Once the COVID-19 dust settles, we are going to hear a lot more about the frustration concept. However, like all court cases, it takes one to three years before we start seeing some decisions. Given that the courts are operating at a significantly reduced capacity, even this time estimate could be optimistic. Accordingly, for the moment, we will have to make do with cases arising out of circumstances that took place three years ago. One such case is Perkins v. Sheikhtavi, 2019 ONCA 925.

Changes

The Ontario government introduced a non-resident tax for purchases of property in the GTA. The announcement took place after the parties had entered into a binding agreement of purchase and sale, scheduled to close July 10, 2017. Expert evidence opined that house prices dropped 20%-30% within days of the announcement. Certainly, the value of the house being purchased dropped. Accordingly, the purchaser was unable to sell her old house (presumably at the price she needed to be able to purchase her new house) and was unable to obtain sufficient mortgage financing. The purchaser was unable to close the transaction; the sellers put the property back on the market, and, on the re-sale, the property fetched only $1.25 million, $620,000.00 less than the purchase price under the agreement.

The sellers sued for the price difference plus their carrying costs to the closing of the re-sale. The purchaser defended, asserting that the government’s announcement frustrated the agreement. The purchaser counterclaimed for the return of her $80,000.00 deposit.

Concepts

Some concepts dealing with frustration are set out below:

1. Frustration applies to contracts, including real estate contracts, when a supervening event alters the nature of one party’s obligation to contract with another to such an extent that to compel performance despite the new and changed circumstances would be to order the first party to do something radically different from what the parties agreed under their contract.

2. A contract is not frustrated if (a) the supervening event was contemplated by the parties at the time of contracting and was provided for or (b) the parties deliberately chose not to provide for it in the contract.

3. A party claiming that a contract has been frustrated has the onus of proving the constituent elements necessary to establish frustration.

 Result

The judge, on a summary judgment motion, agreed that the policy announcement was indeed a supervening event, but held it was not a “radical change in obligation” that would force the defendant “to do something radically different from what the parties agreed.” The Court of Appeal agreed.

The Court noted that the purchaser deliberately chose not to include in the agreement a financing condition or a condition about the sale of her home. She made that choice because, in the heated market at the time she made her offer, her offer would not have been accepted had she done so. In effect, she deliberately took her chances about the financing and sale in order to have her offer accepted. The policy announcement did not force her to do anything radically different; she had agreed to complete a transaction and the announcement did not change that obligation.

The purchaser had also alleged an implied condition, presumably as to financing and the sale of her house. The Court noted that the agreement contained the usual “entire agreement” clause, which precluded any implied condition.

COVID-19

What lessons do we learn from this case about the coming onslaught of COVID-19 cases? We suggest that the lessons about frustration will depend on the contract. We rather doubt that it can be used as an excuse not to close a real estate transaction. It was a supervening event, but a real estate transaction is still a real estate transaction. Lawyers and real estate brokers were categorised as providing essential services and were still able to perform their duties. Prices may have fallen, but there was nothing radically different about the transaction pre and post COVID-19.

Image courtesy of AbsolutVision.

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