January 1st - 2017

Legal Beat: Contract may not be void if both sides treat it as valid

In this commercial case, a judge ruled that the parties had continued to act on the APS after the insurance clause date had expired.

Legal Beat

In this commercial case, a judge ruled that the parties had continued to act on the APS after the insurance clause date had expired.

by Merv Burgard

Legal BeatThe parties in this commercial real estate transaction signed an Agreement of Purchase and Sale (APS). The property was an apartment building in Kirkland Lake. The sale price was $950,000 and the buyer paid a deposit of $50,000 to the seller’s lawyer. Contained in the APS were six conditions, some of which dealt with a Notice to the Seller that it would be void if the conditions were not met. There was also an insurance condition that was without a Notice provision:

The wording was as follows: “This offer is conditional for seven business days after waiver of the financing condition, upon the buyer arranging at his own expense, satisfactory insurance coverage, failing which, this offer shall be null and void and the buyer’s deposit shall be returned forthwith without deduction.”

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Some of the conditions were waived, but not the insurance condition. The buyer later refused to close. The seller sued for damages and forfeiture of the deposit. The buyer’s refusal was based on his concerns about the potential for reselling the property at a later date and the future market and mine situation in Kirkland Lake. The judge reviewed the facts and that noted that the parties had continued to act on the APS after the insurance clause date had expired. The buyer did not inform the seller that the APS was void until a letter was sent from his lawyer after the buyer refused to close.

The buyer did not inform the seller that the APS was void

The determination of whether or not a contract automatically terminates if a condition is not satisfied by its completion date rests largely on the issue of whether or not the condition is a “true condition precedent”. [A condition precedent is any event or state of affairs that is required before something else will occur. In contract, law, it is something that must occur (unless its non-occurrence is excused) before any contractual duty exists.]

If the clause is a true condition precedent, the contract is usually void based on the APS and the intentions of the parties. However, it is possible to mutually waive conditions, and such a waiver can be implied from the conduct of the parties. In that case, the contract then remains a binding one.

That insurance condition was ignored by the buyer in his letter informing the seller that the buyer was not closing based on current and future economic conditions in that city. The subsequent effort to justify terminating the APS based on the insurance condition, was not done honestly or in good faith, according to the judge. The seller was entitled to keep the deposit and the buyer was not entitled to relief from forfeiture. [Relief from forfeiture is a remedy to prevent a party from exercising legal rights that arise as a result of mistake or surprise, or where the exercise of the rights is otherwise unconscionable in all the circumstances. Relief from forfeiture refers to the concept of someone losing (forfeiting) something, and judges have the authority to reduce that loss or effect.]

The deposit was a reasonable one, in the range of three to 10 per cent of the purchase price; it was 5.26 per cent.

Coghlan v Unique Real Estate Holdings 2016 ONSC 6420 (CanLII)

MERV’S COMMENTS

Mervin Burgard Q.C.This is a useful precedent on the interpretation of conditional clauses and the impact of those clauses when the stated time has passed. When the parties continue as if the APS is still alive, it may mean that it is actually still alive -- and it may be interpreted that way if the issue goes to court.

Merv Burgard, Q.C.
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