“Good Business Sense” Can Inform Judicial Rulings on Land Transfer (Dis)Agreements

Published on: July 2020 | What's Trending

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In the recent case of 2484234 Ontario Inc. v. Hanley Park Developments Inc. the Court of Appeal considered a disagreement between a purchaser and seller regarding the extent of land that would be transferred pursuant to a Transfer Agreement. In arriving at its decision to order rectification of the Transfer Agreement, the Court gave credence to the implied terms that would have been necessary to give the Transfer Agreement “business efficacy”. This decision raises several important considerations for those negotiating transfers of real property.

Factual background

On February 8, 2017, the appellant purchaser, 2484234 Ontario Inc. (“248”) entered into an Agreement of Purchase and Sale with the respondent, Hanley Park Developments Inc. (“Hanley Park”), to purchase a property on which a subdivision would be built. In order to connect the subdivision to an existing road, an access road had to be built across an adjacent piece of land owned by the respondent (the “Adjacent Property”).

Two days before closing, Hanley Park’s lawyer sent a letter to 248’s lawyer proposing that Hanley Park transfer Parts 1 to 4 of the Adjacent Property to 248, and grant a temporary easement over the four parts until a severance could be obtained to effect the transfer. The letter also stated that Hanley Park had been advised by its engineer that Parts 1 to 4 were sufficient for the purposes of building the access road. On the closing date the parties entered into a formal Transfer Agreement relating to the transfer and easement over Parts 1 to 4.

Months later, 248 became aware that Part 5 of the Adjacent Property was also required for the access road; however, Hanley Park refused to execute a transfer document which included Part 5. 248 brought an application seeking rectification of the Transfer Agreement to include Part 5 and seeking specific performance.

Lower Court Decision

The application judge ruled in favour of Hanley Park, finding, among other things, that the test for rectification had not been met as Part 5 was never discussed or made the subject of the agreement. The application judge also found that 248 should have verified the boundaries of the land, and stated that allowing Hanley Park to take advantage of this mistake by 248 did not constitute a fraud since the agreement was drafted to transfer Parts 1 to 4, rather than to convey all lands necessary for the access road. This conclusion was reached despite the representative of Hanley Park admitting on cross-examination that he knew Part 5 was necessary for the completion of the access road.

Court of Appeal Decision

Quoting the Supreme Court of Canada decision in Canada (Attorney General) v. Fairmont Hotels Inc., the Court of Appeal reiterated that “Rectification is limited to cases where the agreement between the parties was not correctly recorded in the instrument that became the final expression of their agreement”. It is not available to change an agreement or undo unanticipated effects of an agreement. Therefore the question before the Court was whether a prior agreement existed between the parties that predated the written Transfer Agreement.

The Court found that the letter from Hanley Park’s lawyer constituted a prior agreement between the parties. Despite there being no formal acceptance, the Court stated that acceptance could be inferred as its terms were not disputed, nor was there further negotiation of the terms leading up to execution of the Transfer Agreement.

Having found that a prior agreement existed, the Court went on to consider whether a conveyance of Part 5 was included in the terms. The Court analyzed the letter, including the statement that Parts 1 to 4 would be sufficient, and that Hanley Park had received professional advice to that end, and concluded that these unqualified statements had the effect of allocating the risk that the lands would be sufficient for the access road to Hanley Park. Additionally, the Court referenced case law supporting the practice of construing commercial contracts in accordance with sound commercial principles and good business sense. Here, it would result in a commercial absurdity to construe the agreement as only providing for a transfer of and easement over Parts 1 to 4, when Hanley Park knew that Part 5 was required to satisfy 248’s goal of acquiring land on which to build the access road. The Court ordered rectification of the Transfer Agreement to include Part 5 and granted specific performance.

Takeaways for those Negotiating Transfers of Real Property

Draft to Address Commercial Norms

This case serves as a reminder of the importance of clear drafting that explicitly allocates responsibilities and risks. Where any aspect of a transaction will proceed in a manner that is different from what might obviously accord with “good business sense”, the party facing the risk of an alternative interpretation would be wise to ensure the terms are laid out clearly.

Carefully Consider the Description of the Property to be Conveyed

This case also raises an interesting question as to the extent to which lawyers should go when describing property that is required for a particular purpose. Here, had the formal Transfer Agreement specified that the land to be conveyed must be sufficient for the access road, the subsequent litigation could have been avoided. However, the potential benefit of incorporating a specified purpose should be balanced against the risk. For example, the transferor may end up having to convey a larger property than originally contemplated. It is also possible that one party may be able to terminate the transaction where the specified purpose is frustrated.

Additional Considerations

Entire Agreement Clauses

Would the result have been the same had the Court been asked to consider an entire agreement clause as part of the written Transfer Agreement? There are a variety of factors that can influence whether an entire agreement clause will be upheld, including the scope of the clause, the sophistication of the parties, and the terms of the impugned agreements. A case such as this, where the Court implied a term in order to give the agreement business efficacy, provides support for the argument that an entire agreement clause (to the extent that it does not preclude implied terms) may not prevent an implied term from being recognized, as it is already part of the existing agreement.

Rectification for Planning Act Violations

Finally, it will be interesting to see whether this case is relied upon as an authority for rectification in instances where a Planning Act violation has occurred. Surely it is not the intention of a purchaser to enter an agreement where they ultimately receive nothing as a result of noncompliance with the Act. While rectification is not available to save transactions from unanticipated consequences, it may be available in instances where the parties can show that their prior agreement was for the vendor to convey all of its land and effect a proper transfer.