Legal Blog

Overreach

Over the years, agreements to purchase new homes and condos have become far lengthier than they used to be. Every additional provision usually shifts risk to and hurts the purchaser and protects and benefits the builder. The latest provision that has popped up deals with interest. It says, for example: “Any monies owing by the Purchaser not paid when due, shall accrue interest at the rate of x% per annum compounded monthly until paid.” x% was set at 20% in the two cases that we are about to discuss: Burkshire Holdings Inc. v. Ngadi 2021 ONSC 2550 and Madison Homes v. Shi 2020 ONSC 7810.

Breach

In each case, the purchasers did not close and the builder re-sold the property and sued for damages. In each case, the purchasers put up a spirited defence as to why they should not be held liable for the failures to close. As expected, given the track record of defaulting purchasers, these defences were unsuccessful; they were simply worn out defences that have been shot down in flames over recent years.

Defences

Mitigation – a purchaser has the onus to show that a vendor’s damages could have been reduced by reasonable mitigating steps, but not all possible steps. The mitigation bar is set relatively low. Usually purchasers raise this defence without actually adducing evidence that shows lack of mitigation. In Madison, the purchasers argued that the builder should have resold the property to the purchasers for an offered price  that was lower than the agreement price, but  higher than the ultimate resale price. That argument never works; once a purchaser defaults, a vendor does not have to deal with that purchaser again. The purchasers also argued that the builder’s appraisal of the property was flawed. That argument did not work because the purchasers needed to submit their own appraisal and did not do so.

Force majeure and frustration – the purchaser in Burkshire noted that property values had decreased significantly between the date of the agreement and the date of closing and that, as a result, the purchaser could not secure financing. This, he said, was unanticipated and made the agreement radically different from the agreement that he expected. This argument has also not met with success in the last few years, nor did it succeed this time. The courts have held that a decrease in real estate values is not unforeseen – real estate values go up and down for various reasons. An unexpected, but not unforeseen, decrease does not radically change a purchaser’s obligations.

Standard form – the purchaser in Burkshire argued that a termination clause in the agreement was stringent and onerous and was akin to a liability exclusion clause found in car rental insurance contracts and other contracts of adhesion. This argument was unsuccessful because this transaction was not one in which a small print contract was shoved in his face while he was attempting to rent a car; it was a $1.6 million transaction in which the purchaser was not rushed and had or could have had a lawyer to assist him.

Damages

Damages will be expectation damages (i.e. money to compensate the builder for its loss of bargain). Normally these damages are calculated as at the date of default (e.g., closing), but the trial judge has the discretion to choose another date (e.g., the date of trial) for proper reasons. It is never easy to predict which date will be chosen when the purchaser is the aggrieved party, but relatively straight-forward when the vendor is the plaintiff.

The largest measure of damages is invariably the difference between the agreement price and the ultimate sale price to a third party. The vendor will also receive (i) its additional carrying costs incurred while the property is being resold (e.g., realty taxes, heating and other utilities, and home maintenance costs); (ii) legal fees on the second sale; and (iii) additional sales commission (e.g. the commission on the first sale was for an internal salesperson, but on the 2^nd was for an independent broker). In each of our cases, the appropriate measure of damages was awarded.

Interest

When we mentioned carrying costs as a measure of damages, we would have included interest that a vendor had to pay on any financing of the property. For example if the builder had placed a mortgage of $1.2 million on the Burkshire property, then the interest paid on that mortgage would be part of the carrying costs.

However, no mention of any mortgages was made in either of our cases. Instead, the builders claimed interest at 20% per year, compounded monthly no less, in accordance with the interest clause.

 In Madison, this meant that the interest should have been calculated on the money due on closing of $1,593,000, but the builder, bless its kindly heart, only claimed interest on the damages of $353,000. Our rough calculation of that interest is $70,600. In Burkshire, the damages were set at $273,000 and the builder claimed interest of $176,000. Unlike the builder in Madison, it had no reticence to claim its interest on the full sale price.

In each case, the purchasers claimed that the interest clause was onerous, excessive, and unenforceable and, in each case, the motion judge agreed. In Madison, the judge stated as follows:

“I am not convinced that a party in the Plaintiff’s position – a subdivision builder with a standard form of contract for each of its purchasers – can enforce a surprisingly onerous and unexpected term in that contract without at least drawing it to the other party’s attention. The record indicates that indeed the high interest rate was not called to the Defendants’ attention, and there is nothing to suggest that the Defendants, who signed the APS on the same day that it was presented to them and without any legal advice, understood or were cognizant of this term.”

Further, as to the builder’s generous offer to change the calculation of interest, the judge said:

“…in my view, given that on its face the term is onerous, the absence of evidence that it was drawn to the defendants attention is fatal to the claim for this interest. The plaintiff is implicitly agreeing that the term is onerous and unenforceable given that it does not even claim the full interest which the provision would permit. If the provision is unreasonable and unenforceable, this is not cured by the plaintiff agreeing to apply the interest rate to a lesser sum.”

In Burkshire, the judge merely agreed with the analysis in Madison and another prior case and refused to award the 20% in interest. In each case, the judge allowed only pre-judgment interest at the Courts of Justice rate, which probably resulted in interest that was less than $6,000.

Moral

Had the builders used a more reasonable interest rate, the clauses would have been enforced. Because they used an outrageously high percentage relating to the full sale price rather than their actual damages, they received a paltry amount for interest. Greed sometimes pays, but not in these cases.

Image courtesy of paulbr75.

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