The Supreme Court of Canada in Bhasin v. Hrynew, 2014 SCC 71, recognized the duty of good faith in contract and the obligations of the parties to act honestly in the performance of their contractual obligations. The duty of good faith applies to any contract, including real estate contracts such as Buyer Representation Agreements, Listing Agreements and Agreements of Purchase and Sale.
As discussed in a previous blog post, Agreements of Purchase and Sale generally include a “time is of the essence” clause which means that time limits will be strictly enforced by the courts. Problems often arise when vendors refuse to agree to seemingly minor indulgences requested by purchasers such as an extension of the closing date or an extension of the deadline to provide the deposit.
Two recent decisions in the Ontario Superior Court of Justice have addressed the duty of good faith, as expressed in Bhasin v. Hrynew, in the performance of Agreements of Purchase and Sale. Unfortunately for purchasers, it appears that any argument that vendors have a good faith obligation to agree to indulgences will likely fall on deaf ears of the Court unless the vendor has caused or contributed in some way to the purchaser’s inability to comply with his or her obligations under the agreement.
Insisting on Compliance with Terms of Agreement is not Bad Faith
In Deangelis v. Weldan Properties Inc., 2017 ONSC 4155, the purchaser entered into an agreement with the builder to purchase a condominium townhouse that was scheduled to be built over the course of a few years. The townhouse was constructed and the purchaser took interim occupancy in accordance with the agreement. The problem arose when the purchaser did not have the required financing to complete the transaction on the closing date. The purchaser requested a three day extension which the builder refused and took the position that there was an anticipatory breach of contract and terminated the agreement.
The purchaser brought an application for specific performance. The builder brought an application for a declaration that the agreement was validly terminated, forfeiture of the deposit and discharge of the Certificate of Pending Litigation. The two applications were heard together with the only issue being whether the agreement continued to be valid and binding or whether the agreement was terminated.
The purchaser argued that the builder had an obligation to act in good faith and could not arbitrarily rely upon the “time is of the essence” clause in the agreement when the builder knew that the closing would take place within three days of the original closing date. The Court held that, where the builder did not cause or contribute to the purchaser’s lack of financing, insisting on compliance with the agreed upon terms of the agreement does not amount to acting in bad faith, and stated the following:
… it would be wrong in law to find that insisting on compliance with a term of the agreement, agreed to by both parties with the assistance of counsel, amounts to bad faith depriving a party of the ability to strictly enforce an agreement where time is of the essence. Such a determination would mean that no party could insist on strict compliance with the term of an agreement because to do so would or might amount to bad faith. This would throw the law of contract into chaos by creating uncertainty in the enforcement of contracts.
Duty of Good Faith Does not Preclude Reliance on Terms of Agreement
The decision in Xu v. 2412367 Ontario Limited, 2017 ONSC 4445, involved the purchase and sale of a property in Markham intended to be developed into a retirement living complex. The purchase price was about $44 million. The agreement required the purchasers pay an 8% deposit divided into three payments, namely $0.5 million, $0.5 million and about $2.5 million on certain dates. The purchasers paid the first two deposits of $0.5 million on time but the purchasers requested an extension of about a month to pay the remaining $2.5 million. The vendor did not agree to the proposed extension and immediately terminated the agreement when the deadline passed.
The vendor brought a summary judgment motion to dismiss the action and for an order that the purchasers forfeited any deposits paid up to the time of the termination. The purchasers responded with a summary judgment motion for specific performance or alternatively relief from forfeiture of the deposit.
The Court noted that the agreement included provisions related to the parties’ termination rights and a “time shall be of the essence” clause. The purchasers argued that the vendor acted in bad faith because it was motivated to terminate the agreement in order to sell the property for a higher price. The Court disagreed and held that:
While the Supreme Court of Canada has recognized a duty of good faith in the performance of contracts (Bhasin v. Hrynew, 2014 SCC 71), such a duty does not preclude parties from relying on and enforcing clear terms of a contract.
The Court found that the vendor was entitled to terminate the agreement when the purchasers failed to pay the final deposit amount on the agreed upon date, and further found that the deposit of $1 million was forfeited because it was only about 2% of the purchase price and there was no evidence that this amount was disproportionate to the damages suffered or unconscionable.