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‘He Who Lives by the Sword Dies by the Sword’ – Anticipatory Breaches and Time Is of the Essence Clause

He who lives by the sword dies by the sword Image

The Ontario Court of Appeal recently confirmed that, when it comes to high-stakes commercial real estate transactions, both buyers and sellers must be prepared to put their money where their mouths are.

In 1179 Hunt Club Inc. v. Ottawa Medical Square Inc., 2019 ONCA 700, Ottawa Medical Square Inc. (the “Buyer”) and 1179 Hunt Club Road Inc. (the “Seller”) entered into an agreement to buy and sell commercial condominium units in a new development for $5.6 million. The Buyer paid a $250,000 deposit towards the purchase and when the deal fell apart the Seller sought to keep the deposit and pursue a damages claim against the Buyer.

When the parties entered into the agreement, the development was still being built and the closing date was uncertain. As per the terms of the agreement, after the condominium documents had been registered, the Seller set the closing date as November 28, 2017. Less than a week before the closing date, the Buyer requested an extension in order to secure financing.

The Seller rejected the extension request and insisted that if the sale did not close on the closing date, the Seller would retain the deposit and pursue damages. However, as luck would have it, on the day before the closing date, the Seller learned that, due to an error by the Land Registry Office, it would not be able to close the transaction on time either.

The Seller nonetheless maintained its position that it was ready, willing and able to complete the transaction on the closing date, but it did not do so because the Buyer indicated that it was not willing to close in a timely manner. The Seller commenced legal action to retain the deposit and pursue damages against the Buyer.

The Court of Appeal agreed with the Seller’s position that the agreement was anticipatorily breached by the Buyer. The Court held that merely requesting an extension of time did not amount to an anticipatory breach. But in this case, the Buyer sought the extension because it did not have the financing needed to complete the transaction on the closing date. As such, the Buyer’s conduct was held to be an anticipatory breach and the Seller was entitled to refuse the extension request.

Ironically, the Seller’s insistence on strict adherence to the closing date proved to be fatal to its claim. Although the Seller alleged that it could have completed the transaction on the closing date, the evidence before the court told a different story. Namely, that the Seller could not have, in fact, closed in a timely manner as a result of the error by the Land Registry Office.

It was therefore held that, given the Seller’s own failure to be ready, willing and able to close as scheduled, the agreement came to an end on the closing date. This entitled the Buyer to the return of the deposit.

The Court of Appeal broke down the situation succinctly:

“Having refused to accept the purchaser’s repudiation of the agreement, and having insisted on perfection in the purchaser’s performance, the vendor was required to render perfection in its own performance and it did not. The vendor’s failure to tender on [the closing date] was fatal. This strict approach is not unusual in the law, in view of the maxim ‘he who seeks equity must do equity’, or in life, where the proverbial caution that ‘he who lives by the sword dies by the sword’. Both resonate.”

The key takeaways from this decision are twofold. First, as a purchaser in a commercial transaction, it is fine to request an extension of time to close. However, if the request is made on the basis that the purchaser will not be able to complete the transaction on the closing date, that will amount to an anticipatory breach of the agreement.

Second, and perhaps more importantly, if one party insists on strict adherence to the terms of the agreement, they will be held to the same standard. This especially holds true for agreements with time is of the essence clauses.  In this case, the Court of Appeal made it very clear that a vendor cannot force a purchaser to abide by such a clause if they are not prepared to do the same. In other words, if they insist on living by the sword, they must be prepared to die by it as well.

In this case,the Seller not only lost the deposit, but was unable to pursue damages either.

Just heard about Pallett Valo being chosen as One of Ontario's Top Three Regional Firms. Congratulations – well deserved.
Peter Campbell, BDO Canada LLP