avoiding litigation in a hot real estate market and what happens if it's unavoidable

Igor Ellyn & Kathryn J. Manning 1

Avoiding Litigation in a Real Estate Market and what happens if it’s unavoidable

Igor Ellyn, QC, CS ELLYN BUSINESS COUNSEL

T: 416.365.3750 E: [email protected] www.ellynadr.com

Kathryn J. Manning Barrister and SolicitorT: 416-238-7461 E: [email protected]

OR


Who We Are and What do Litigation Lawyers Know About Real Estate Transactions?

Igor Ellyn Kathryn (Kate) Manning• Toronto business and property

litigation lawyer for more than 40 years

• Author, Litigating and Arbitrating Business Disputes (Lexis-Nexis Canada 2015), two other books and 50 articles on litigation matters and frequent speaker on legal topics

• Past President, Ontario Bar Association• Chartered Arbitrator and Mediator • Chair, Toronto Chapter, CIArb. • Counsel in many cases which have

gone to trial or appeal, including aborted real estate transactions

• Former senior partner of a five-lawyer business litigation boutique. Since 2015, independent practice and collaboration with Kate Manning on some matters

• Toronto business litigation lawyer for more than 18 years

• Practiced in the commercial litigation groups of two of Canada’s largest law firms for more than 15 years

• Practiced at a specialized boutique law firm focusing on electronic document management and e-discovery for 2 years

• Commenced an independent litigation practice in Toronto in 2015

• Many years of experience as counsel on business and contract litigation

• Frequent speaker at professional legal education sessions on commercial litigation topics

We know quite a lot about what happens in real estate litigation Thank you for allowing us to share it.


How Real Estate Deals Can Go Wrong Purchaser does not have the closing funds Vendor decides not to sell Vendor sold the property to someone else Vendor does not own the property Vendor’s spouse refuses to sign the transfer Mortgagee refuses to advance closing funds Title defect, lien, execution, misdescription, easement, right-of-way Vendor owns adjoining unsubdivided lands Inspection discloses serious construction problems Property is damaged by fire or other hazard before closing Property is condemned by Building Department One party dies or becomes incapacitated Purchaser asks for an abatement which the Vendor refuses to give


Legal Issues which Affect the Closing Ambiguous terms in the Agreement of Purchase and Sale Latent Defects – undisclosed construction or other issues Wrong description of land or building Title issues – construction or tax liens, judgments, CPLs Failure to pay secondary deposits Purchaser’s inability to obtain closing funds locally or from abroad Vendor refuses to close or alleges breach by Purchaser Purchaser refuses to close and alleges breach by the Vendor Vendor cannot close because of a title, land or building problem Anticipatory breach by either party before the closing date


Consequences of the Deal Not Closing

Purchaser does not become the owner of the property Vendor does not get the closing funds If Purchaser breached, Vendor claims forfeiture of the deposit If Vendor breached, Purchaser may suffer damages There may be a “domino effect” on other deals due to lack of funds Each party might want to start a lawsuit If Vendor refuses to close, s/he will look for breaches by the Purchaser If Purchaser refuses to close, s/he will look for reasons for not closing Purchaser may want an abatement of the purchase price due to a value

reduction Vendor could claim against the realtor for deposit Purchaser could make a Third Party indemnity claim against the realtor


Remedies When the Deal Does Not Close: What can the Purchaser Do? If the Vendor refuses to close, the Purchaser has the following options:

Terminate the Agreement, ask for the deposit to be returned Sue for damages for extra cost of purchasing a comparable property and other expenses Damages could include alternate living expenses, interest, moving and legal costs Keep the Agreement alive and claim specific performance of residential property –

Purchaser has to prove the property is unique – more on this later Purchaser can also claim damages in addition to specific performance Purchaser has to mitigate his/her damages reasonably by looking for comparable

properties and making reasonable offers on them - more about this later Ask for an abate of the purchase price if the was a hidden construction or property

dimensions defect Ask for a Vendor and Purchaser’s Motion to resolve a title defect.


Remedies When the Deal Does Not Close: What Can the Vendor Do? If the Purchaser refuses to close, the Vendor has the following options:

Claim the agreement is terminated and forfeit the deposit – more about this later Claim additional damages, if any – won’t happen in a hot real estate market Ask for an abatement of the purchase price if there is structural or lot size issue Claim specific performance to require the Purchaser to close – never happens Ask for a Vendor and Purchaser’s Motion to resolve a title disagreement Put the property back on the market immediately to mitigate damages If there is doubt about whether the Purchaser or the Vendor breached the

agreement, the Vendor could agree to return the deposit and quickly re-sell the property and in this market, probably at a higher price


Legal Issues Concerning Refusal to Close? Anticipatory Breach Refusal to close on the closing date Vendor’s refusal to close Purchaser’s refusal to close “Time is of the essence” Breach by the other party? Misrepresentation by Vendor Principle of Honest Performance of Contracts Request for Abatement Title Defect: Vendors and Purchaser’s Motion


Specific Performance: When is it Available? Specific Performance is a declaration of the Court, which directs the Vendor (or rarely,

the Purchaser) to complete the transaction with adjustments for interest, damages and legal costs created by the delay between the aborted closing date and Court’s decision.

Until 1996, Specific Performance was the most common legal remedy for a Vendor’s breach of a land sale transaction.

The 1996 Supreme Court of Canada decision in Semelhago v. Paramadevan, 1996 CanLII 209, changed this.

Specific performance will be granted only if the plaintiff can show the property is unique in the sense that it has a quality which cannot be readily duplicated elsewhere. This quality should relate to the proposed use of the property and it must be particularly suitable for the purpose for which it was intended.

An objective assessment of uniqueness requires that a “reasonable person familiar with the facts surrounding their purchase and sale agreement would consider the property to be unique: Gillespie v. 1766998 Ontario Inc., 2014 ONSC 6952 (CanLII) paras. 2, 32-33.

Even where the Buyer claims specific performance, the Buyer must look for comparable properties and convert the claim to an action for damages if s/he buys another property.


Specific Performance: No longer Available for Commercial Real Estate Specific performance is only for residential transactions. In Southcott Estates Inc. v. Toronto Catholic District School Board, 2012 SCC 51, the

Supreme Court held that even a residential property development with special features was just an investment and did not meet the test of uniqueness. Even uniquely good real estate investments are unique only in the sense of having good prospects for profitability.

Lost profits arising from breach of contract are compensable in money damages. Similar conclusions were reached by the Court in cases involving apartment developments

in Hunter’s Square Developments Inc. v. 351658 Ontario Ltd 2002 CanLII 9163 (ON CA) and Domowicz v. Orsa Investments Ltd. 1993 CanLII 5472 (ON SC),varied ONSC) 1998 CanLII 17748 (ON CA).

An exception to this principle is the recent decision of the Ontario Superior Court in Gillespie v. 1766998 Ontario Inc., 2014 ONSC 6952, where Justice Myers allowed specific performance of a large rural property near Kingston, which two university art professors intended to use as their home, art studio and “International Summer Artist Residency”.

This was an unusual case. The judge appears to have been especially sympathetic to the Plaintiffs’ unique situation. It appears that the Defendant did not appeal.

http://www.canlii.org/en/on/onsc/doc/1993/1993canlii5472/1993canlii5472.html

http://www.canlii.org/en/on/onca/doc/1998/1998canlii17748/1998canlii17748.html


Keeping the Agreement Alive v. Terminating the Agreement When one party breaches a contract, the innocent or non-breaching party

typically takes the position that the contract is over and s/he is suing for damages. This is important because ending the contract relieves the innocent party from further performance of the contract.

With the contract terminated, the innocent party then uses best efforts to reasonably mitigate damages --- by looking for comparable properties and making reasonable offers, and then sues for the losses suffered as a result of the other party’s breach.

However, if the innocent party – the Purchaser – intends to claim specific performance, the agreement must be kept alive. The Purchaser then says, I am ready, willing and able to perform my part of the contract.

To ensure that the property will not be sold while the litigation is proceeding, the Purchaser will seek an order to issue a Certificate of Pending Litigation (“CPL”) and sometimes, a Caution. More about this later.


When can the Agreement be Terminated? Of course, the Buyer and the Seller can always agree to terminate the

agreement. Section 10 of the standard OREA APS states that the APS is to be terminated if

there is a valid title objection which the Seller cannot remove and which the Buyer will not waive. The kinds of objections which fall into this category can be complicated and are outside the scope of this discussion.

Rescission or Repudiation? Two Confusing Terms As the SCC explained in the Guarantee Co. of N.A. v. Gordon Capital Corp. 1999 CanLII 664 (SCC) para. 39: Rescission: If one party, say the Buyer, claims a material misrepresentation or fraud

in respect of the contract, such as a significant misdescription or the Seller is not the owner or for example, there is UFFI problem, the Buyer can “rescind” the contract and get back the deposit.

Repudiation: Where one party says “I will not perform my obligations under the agreement”, the other party can respond, depending on what the refusal to perform is, by saying essentially “the contract is terminated because of your refusal to perform”. Note that you don’t need to say these precise words.


What Types of “Refusals to Perform” Allow the Other Party to Repudiate the Agreement? Not every breach by one party allows the other party to say that that the

contract is terminated. The breach has to be a fundamental breach. The SCC described a fundamental breach as a failure of a party’s

performance of its obligations under the contract that deprives the other party of substantially the whole benefit of the agreement.

If the Buyer says, “I am not paying the deposit”, that is a fundamental breach. Courts have held that even if the Buyer wants to pay the deposit later than the APS provides, the Seller can refuse and declare a fundamental breach; however, it may depend on how much later. Later the same day is different from several days later, for example.

It could be different, however, if the Buyer pays a deposit late and the Seller accepts it. The Seller is probably not able to terminate at a later time because the breach has been remedied and is no longer fundamental. Sometimes, the innocent party has “waived” the other party’s breach by its conduct or is “estopped” from relying on the other party’s breach.

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Fundamental Breach Another example of fundamental breach is the refusal to close on the closing date.

Justice Morgan recently held that a Seller was right to refuse to close when the Buyer wanted to delay the closing by two days: 2336574 Ontario Inc. v 1559586 Ontario Inc., 2016 ONSC 2467.

However, another case said that a delay of less than an hour on the same day in delivering the closing funds was not a fundamental breach and the purchaser was entitled to close the deal : Walker v. Jones, 2008 CanLII 47725.

If the Seller says “I am refusing to close”, that is a fundamental breach. The Buyer then must decide if s/he wants to keep the contract alive and claim specific performance or terminate the contract and sue for damages.

The Courts have established five criteria to determine whether a breach is fundamental enough to justify the non-breaching party to terminate the contract:

1) Was the breach remedied? 2) Was the breach trivial in relation to the party’s whole performance under the APS? 3) Did the other party consider the breach serious when it occurred? 4) Is there a possibility of repetition of the breach? 5) Did the non-breaching party suffer any damages? Igor Ellyn & Kathryn J. Manning


“Time is in all respects of the essence” Section 20 of the OREA APS contains this standard clause. It means that

each of the parties has an duty to perform their part of the agreement at the time when the APS states and that if a party does not do so, that is a reason for terminating the agreement.

In other words, the APS makes every time breach, even trivial ones, fundamental.

However, the Courts have held that a trivial breach of time may not permit the other party to rely on the “time is of the essence” clause. Also, if one party accepts variations of time in performance of some parts of the agreement, that party may not be able to rely on a short delay on another time limit. It is difficult to give examples because the result will depend on the particular facts of the case.

Judges will sometimes weigh (often without expressly saying so), who are the innocent parties and who are the parties in breach. If the judge thinks that one party is acting in a commercially unreasonable manner to try to get out of the agreement, that could affect the right to use the “time is of the essence” clause.


Principle of Honest and Good Faith Performance In the SCC case of Bhasin v. Hrynew, 2014 SCC 71, the Court held that

there is a principle of honest performance of contracts. Contracts must be performed in good faith by both parties.

This means that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. The duty of good faith is a general doctrine of contract law that imposes a minimum standard of honest contractual performance.

There are now hundreds of cases in which lawyers and judges put a different spin on how far the principle of honest performance goes. It probably prevents a party from alleging very trivial breach to try to get out of the contract but how trivial a breach is often depends on which side of the case you are on.

In the case of 2336574 Ontario Inc. v 1559586 Ontario Inc., 2016 ONSC 2467, the judge decided that honest performance did not mean that everything had to be flexible or approximate. The starting point for good faith performance is to perform the APS according to its written terms


Action for Damages This is a lawsuit by one party to the APS against the other. In a rising market,

the claim will typically be by the Buyer against the Seller for refusing to close the deal.

The Buyer has to prove that the Seller breached or anticipatorily breached the contract to succeed.

The Buyer has to prove damages: What loss has the Buyer suffered? There will be losses associated with 1) looking for a new house; 2) alternate accommodation; 3) additional moving expenses; 4) additional legal fees; and 5) the big one: the cost of buying a comparable property.

The measure of damages is “to put the plaintiff in the position he would have been in if the contract had been performed”: Hamilton v. Open Window Bakery Ltd., 2004 SCC 9, para. 17.

This means that if purchasing a comparable property would cost $500,000 more than the property under the APS, the Vendor could be liable for these damages. However, another property will only be “comparable” not identical. This may affect the amount of damages.


Duty to Mitigate Damages Mitigation means that the plaintiff or non-breaching party has to do all s/he can to

make the loss as small as possible, acting reasonably: Southcott Estates Inc. v. Toronto Catholic District School Board, 2012 SCC 51.

This means that a Buyer has to begin looking for comparable properties right away and make offers on properties that are comparable. If the claim is just for damages, there is a serious issue when the price of a comparable property is $500,000 more the price of the property on the aborted deal. However, if the Buyer fails to attempt to mitigate, the Court may be unable to award damages because the Buyer’s loss has not “crystallized”.

If the Buyer seriously attempts to mitigate but cannot find a comparable property at a reasonable price, the measure of damages may be the difference between the price of the property under the APS and the price at the time the action was commenced. However, in a rising market, there is a strong case to be made that the date for assessing the loss should be the date of trial.

If the Seller claims the attempts to mitigate are not sufficient or reasonable, the Buyer has the onus to prove this. On the other hand, if the Buyer says mitigation is impossible, the onus of proof shifts to the Buyer to explain why s/he could not mitigate.


Forfeiture of Purchaser’s Deposit The deposit under the APS has two purposes. 1) It is a good faith payment to show

that the Buyer is serious about the transaction; and 2) It is applied against the purchase price on closing.

In contract law, it is also generally understood that if the Buyer breaches the APS by not closing the deal, the Seller has a right to claim the deposit as “liquidated damages”, which means an approximate pre-estimate of the loss the Seller will suffer as a result of the breach.

Many agreements in commercial transactions actually have a clause that if the deal does not close by reason of the Purchaser’s breach, the deposit is forfeited to the Vendor. However, interestingly, the standard OREA APS has no such clause.

In a rising market, the Seller probably suffers no damages as a result of the Buyer’s refusal to close. Therefore, forfeiture of the deposit could be punitive to the Buyer. If the Court is satisfied that the forfeiture of the deposit would be a penalty, the Court can give the Buyer relief against the forfeiture.

The broker is required to hold the deposit until parties agree to release it or an order of the Court. Therefore, there will often be negotiations about the split of the deposit depending on the strength of each party’s position in the case.


Protecting the Property – Cautions and Certificates of Pending Litigation (“CPL”) If the Buyer is claiming specific performance of the APS, the Buyer can register a

Caution against title under either sections 71 or 128 of the Land Titles Act. Both of these tools prevent dealings by the Seller with the land for a specific time unless earlier removed by Court Order or by the Director of Titles on notice to the Buyer.

A section 71 Caution is in support of an Agreement of Purchase and Sale. The Buyer has to deposit the LTT immediately. The Caution expires 60 days after the closing date in the APS.

A section 128 Caution is in support of the Buyer’s claim for an ownership interest in the property, such as a claim for specific performance. This Caution expires 60 days after it is registered. This might be useful as a stop gap until a CPL is obtained becuase it can be done more quickly.

Where the Buyer claims specific performance, a CPL will also be claimed. This requires a motion to court without notice but on full disclosure of the facts and upon making an undertaking to pay any damages that result from the registration. If the Court grants the Order for a CPL it is registered on title. The Seller can go to court on notice to the Buyer to remove it if the CPL was not properly obtained.


What a Realtor can do to Avoid Litigation #1 Make sure agreement terms are unambiguous. Make sure the parties understand all the terms of the agreement. Many parties do not speak English well and do not understand legal

terms. Do they need a translation or legal advice before the offer is submitted?

Where is the balance between making an offer in a hot market and the parties not understanding the terms of the deal?

If there is a construction or property issue, the Vendor must disclose it.

If there have been renovations, was there a building permit? Were the renovations done under the Ontario Building Code? Avoid handwritten changes to the agreement whenever possible. If there are handwritten changes, ensure they are very legible.


What a Realtor can do to Avoid Litigation #2

If there are some red flags of problems with a house or property, ensure that the Seller gets an inspection report from an independent and reliable expert.

Get Building Department clearance that there are no work orders. Ensure that deposits are paid by certified cheques. When there is a long closing, get additional deposits. If there is a problem with any payment, notify the Vendor immediately. Where are the closing funds coming from? How does the realtor know that

the Purchaser will have the money to close the deal? If the closing funds are coming from abroad, be diligent about finding out

the source and when the money will be available. Communicate: Let the Buyer and the Seller know what is going on,

especially in co-representation situations. Document all conversations by email in clear language.


Don’t be Afraid to Ask for Advice. Your broker and manager might be more experienced than you.

Don’t hesitate to ask at the first sign of a problem with a deal. When a problem arises, you might be afraid to disclose because

it might jeopardize the deal. This is always the wrong approach. Disclose. Disclose. Disclose. Prompt and full disclosure will enable the parties to work matters

out and could prevent you or the brokerage from being sued by the parties.

Stay on top of developments in procedure and law. Ask a lawyer for information, including us.

Useful Law and Helpful Charity! In 2015, I published a book called Litigating and

Arbitrating Business Disputes You may find a lot of interesting and useful material in

it. The book is sold by LexisNexis Canada online for $115

per copy. I have 10 copies which I will be pleased to autograph

and distribute for donations of $40.00 or more per book to Eva’s Place, 360 Lesmill Road, Toronto (www.evas.ca), a 40-bed emergency shelter, for homeless youth ages 16-24 years. Since all of us here are interested in providing the best housing, this is an opportunity to help less fortunate young people who need to get back on track with their lives.

I will request a tax receipt in your name for anyone who donates $50 or more.


Closing the Presentation!

We hope this presentation provided you with some useful insights about what happens when a real estate does not close.

Thank you for inviting us.

Igor Ellyn, QC Kate Manning [email protected] [email protected] 416-365-3750 416-238-7461

mailto:[email protected]

mailto:[email protected]