Legal Blog

Renege (2)

This is the 2^nd newsletter dealing with purchasers refusing to close agreements and the issues raised in ensuing actions.

Ready or Not

In Di Millo v. 2099232 Ontario Inc. 2018 ONCA 1051, a purchaser bought a lot in the vendor’s subdivision. The agreement provided that the purchaser was to construct a building within 30 months of closing, failing which the vendor had the option to buy back the land at the original price less real estate commission. Once the vendor exercised the option, the parties were to complete the sale within one month.

The purchaser failed even to start to construct, much less construct, the building within 30 months. He asked for and was granted a one-year extension. One year later, he had done nothing. The vendor’s lawyer gave notice (improperly) of the exercise of the option three months after the date on which the purchaser was to have built his building, but, regardless, gave proper notice of the option exercise three months after the first notice.

The purchaser requested another year’s extension; the vendor refused. To complicate matters, the purchaser had granted two mortgages on the property – contrary to the agreement. Within the one-month closing period, the vendor demanded the discharge of the mortgages, failing which it would bring an application. The purchaser’s lawyer replied by offering to accept service of the application,  the equivalent of saying that the purchaser would neither discharge the mortgages nor close.

The application judge dismissed the application, deciding that the notice to buy back the land was delivered too late because “time was of the essence” and the notice was given outside of the reasonable notice period contemplated in the agreement. He further held that the vendor was not ready, willing, and able to close. The vendor appealed the decision.

Time of Essence

It seems that the application judge’s decision was replete with errors. The first error dealt with time of the essence. The Court explained that “a ‘time is of the essence’ clause is engaged where a time limit is stipulated in a contract. The phrase ‘time is of the essence’ means that a time limit in an agreement is essential such that breach of the time limit will permit the innocent party to terminate the contract.”

The agreement did indeed contain the usual time of the essence clause, but this clause does not itself impose a time limit; rather, it “dictates the consequences that flow from failing to comply with a time limit stipulated in an agreement.” This is where the application judge erred. The option clause stipulated two time limits: the first to build the building and the second to close the transaction after the vendor exercised the option. It was silent as to the time in which to exercise the option.

When an agreement sets no time limit, a reasonable time is implied and time of the essence is irrelevant.

The Court held that, under the circumstances, a six-month delay in exercising the option was reasonable. The purchaser did not appear interested in timely compliance, had not built the building, had received a one-year extension and requested another, and had never even asserted that the option had expired.

Tender

Here we go again. The vendor did not tender. The application judge concluded that the vendor was not ready, willing, and able to complete the transaction. However, the Court noted that the vendor did not have to tender: “tender is not required from an innocent party enforcing his or her contractual rights when the other party has clearly repudiated the agreement or has made it clear that they have no intention of closing the deal.”

The Court then had to determine whether, by words or conduct, the purchaser communicated a decision not to complete the agreement. It had no difficulty in making this finding. The lawyer’s reply inviting the application sealed the deal in that regard.

Specific Performance

Since the 1996 Supreme Court of Canada decision in Semelhago, specific performance is not automatic for real property. The applicant must demonstrate that the property is unique. Unique means that the “property in question has a quality that cannot be readily duplicated elsewhere. This quality should relate to the proposed use of the property and be a quality that makes it particularly suitable for the purpose for which it was intended.”

The Court granted specific performance because the land was unique; it was part of the vendor’s subdivision and all of the subdivision had to be completed before the vendor was able to regain its deposit under its agreement with the municipality.

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Update

In our April 2019 newsletter, we discussed Benedetto v. 2453912 Ontario Inc., a 2018 decision by which the purchaser’s deposit was forfeited – in the face of a clause that noted the purchaser entered into the agreement on behalf of a corporation to be incorporated and without personal liability. The Court of Appeal (2019 ONCA 149) has upheld that decision. The Court noted that a deposit does not constitute damages for breach of contract; rather, it stands as security for its performance. Accordingly, the obligations under a contract for purchase and sale are distinct from the obligations incurred by the payer of the deposit. Neither the Court nor the motion judge was willing to articulate an interpretation that would render a deposit meaningless, provide the purchaser with no incentive to close, and provide no compensation to the vendor for failure to close.

Image courtesy of lauramusikanski.

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