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When Time Is of the Essence, Don’t Act in Bad Faith

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Earlier this year, in 1179 Hunt Club Inc. v. Ottawa Medical Square Inc., 2019 ONCA 700 the Ontario Court of Appeal provided some important guidance on “time is of the essence clauses” in real estate transactions. It was held that if one party insists on strict adherence to a time of the essence clause, they will be held to the same standard. Specifically, a vendor in a commercial real estate transaction cannot force a purchaser to abide by a time is of the essence clause, if they are not prepared to do the same. See our previous blog post.

The Court of Appeal recently revisited this topic in Fortress Carlyle Peter St. Inc. v. Ricki’s Construction and Painting Inc., 2019 ONCA 866, where it was held that a time is of the essence clause is not enforceable by a party that acts in bad faith.

In that decision, the plaintiff, Fortress Carlyle Peter St. Inc. (Fortress) entered into an agreement to purchase a commercial property in Toronto from the defendant, Ricki’s Construction and Painting Inc. (Ricki’s).

Fortress had tried to purchase the property from Ricki’s since 2013 as part of a large-scale condominium development project. Finally, in the summer of 2017, the parties reached a deal. But the property had four commercial tenants, one of which was 1739474 Ontario Inc. (173), a company owned by the brother of the owner of Ricki’s.

A letter of intent was signed. Fortress agreed that it would buy the property for $4.5 million, subject to it being satisfied with the leases that encumbered the property.

After reviewing the leases, Fortress informed Ricki’s that it was satisfied, and the parties signed an agreement of purchase and sale. Fortress had noted that 173’s lease contained a provision allowing it to be terminated on 90 days’ notice.

The agreement contained the following terms:

  • The deal would close on August 13, 2018 at 6 pm.
  • Ricki’s would provide Fortress with estoppel certificates for all leases in the building at least five days before the closing date.
  • Fortress would pay a $1 million deposit.
  • Time would be of the essence.

All the tenants left the building long before the closing date, except for 173.

Ricki’s didn’t provide the estoppel certificate for 173’s lease to its lawyer until the morning of the closing date. Not only was the certificate late, it was incorrect. Instead of stating that the lease could be terminated in 90 days, the certificate was changed to state that termination of the lease “was to be negotiated between the parties”.

At about noon on the closing date, the altered estoppel certificate was sent to Fortress’s lawyer, who advised that the alteration was not acceptable. The correct estoppel certificate wasn’t sent to Fortress’s lawyer until close to 5 pm. Fortress then asked for a little time to review the certificate and requested that the closing date be extended until the next morning.

At 6 pm, Ricki’s counsel informed Fortress’s counsel that Ricki’s had delivered all the necessary closing documents and was ready to close; and if the closing funds weren’t delivered by Fortress by 6 pm, it would be in default and the agreement would be terminated with no extensions. (The court noted that it was difficult to characterize this statement. Because if it was meant to be a warning, it was already too late the moment it was sent).

At 6:19 pm, Fortress’s lawyer confirmed that the closing funds were transferred, and the owner of Ricki’s was advised of this at 6:20 pm. He responded that the transaction was dead and Fortress’s deposit was forfeited.

Just over a week later, Fortress sued for specific performance and brought a summary judgment motion for this relief. Ricki’s brought its own summary judgment motion to have Fortress’s claim dismissed on the basis that Fortress breached the time is of the essence clause.

Fortress’s claim for specific performance was granted and Ricki’s motion was dismissed.

The court explained that for a party (in this case Ricki’s) to insist on time being of the essence two preconditions had to be met:

  • The party had to have shown itself to be ready, desirous, prompt, and eager to carry out the agreement.
  • The party could not have been the cause of the delay or default in performing the agreement.

In this case, neither of these conditions was satisfied. In failing to deliver the estoppel certificate on time and, by initially providing an incorrect certificate, Ricki’s not only breached the sale agreement, but it also acted in bad faith. Due to its conduct, Ricki’s could not insist on time being of the essence and it was therefore not entitled to terminate the agreement and retain the deposit, even though Fortress technically did not meet the 6 pm deadline.

Fortress, on the other hand, was held to have acted in good faith and had satisfied the preconditions for a specific performance claim. Namely, it would have been able to close the transaction on August 13, if it hadn’t been for Ricki’s misconduct. Most notably, the court determined that the delivery of the estoppel certificate was critical to Fortress’s development plans. And delivering it one hour before the 6 pm closing time precluded Ricki’s from relying on the time is of the essence provision in the agreement.

The court went as far as to state that late delivery of the estoppel certificate was likely a tactical decision by Ricki’s to frustrate Fortress’s ability to close the sale in a timely manner.

The court also noted that even if both parties had been at fault for not closing on time, Fortress should still be granted specific performance. Because when both parties to a contract are in breach, the contract remains alive with time no longer of the essence.

However, either party can restore time of the essence by giving reasonable notice for a new date of performance. That is what occurred in this case. When Fortress’s counsel asked for the closing date to be extended for one day to give Fortress time to review the estoppel certificate, Fortress was proposing a new reasonable date, where time would be of the essence. By refusing this reasonable request, Ricki’s couldn’t claim that time was of the essence.

Both the Hunt Club and Fortress decisions demonstrate that, while time is of the essence clauses are powerful, they’re also quite fragile.

If a party to a transaction of this nature performs the terms of the contract on time and acts in good faith, they’ll be able to insist on time being of the essence. Had Ricki’s delivered the correct estoppel certificate on time, it would have been entitled to terminate the agreement and retain the deposit as a result of Fortress’s failure to close at 6 pm sharp.

These cases also show that a time is of the essence clause is a two-way street. Parties will lose their right to enforce it, if they don’t strictly hold up their end of the bargain.

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Haig DeRusha, DeRusha Law Firm