Selling or purchasing a property is often a significant transaction for an individual or corporation. However, when a real estate transaction does not close smoothly, it can result in litigation. Commercial real estate disputes can involve complex technicalities, and when a transaction falls through, claims for large sums of money are often involved. 

The Ontario Court of Appeal recently dismissed an appeal by a purchaser after a commercial transaction did not close due to financing issues. The purchaser appealed the quantum of damages equivalent to the deposit amount and sought relief from forfeiture. The Court ultimately determined that a party’s entitlement to the full sale price of a property in litigation is not based on the vendor holding title to the property.

Agreement to Purchase Commercial Building Contingent on Financing

In 1854329 Ontario Inc. v. Cairo, the appellant individual appellant, Mr. Cairo, agreed on behalf of his company to buy a commercial building from the respondent, 1854329 Ontario Inc. The two co-owners of the property executed a power of attorney to allow 1854329 Ontario Inc.’s president and co-owner to sell their ownerships on their behalf.

The parties agreed on a sale price of $7,250,000, and Mr. Cairo provided a deposit in the amount of $200,000. The agreement of purchase and sale was conditional upon financing. However, it provided that if financing was waived by the purchaser or the purchaser provided notice that it was fulfilled, an additional $200,000 deposit would be required. 

Bank Changes Terms Days Before Closing

The purchaser was given a term sheet from its bank that was prepared to lend him $6,650,000 to help fund the property purchase. The term sheet specified that this was “not a loan offer”. The purchaser waived the financing condition and provided the additional $200,000 deposit.

The transaction was scheduled to close on April 7, 2020. On April 2, 2020, the bank changed the terms of the loan. The purchaser thought that the bank changed the terms because they believed that the COVID-19 pandemic would impact his business. 

Purchaser Seeks Extension for Closing Date

The purchaser’s counsel advised the vendor’s counsel of the amended financing offer and requested a six-month extension on the closing date. The vendor refused.

Six months later, the vendor tendered and sold the property for $75,000 less than the price previously agreed to by the purchaser. 

Vendor Granted Ability to Retain Deposits

The vendor sought summary judgment from the courts, seeking retention of the $400,000 in deposits paid by the purchaser. In response, the purchaser sought relief from forfeiture (i.e. to be protected from the consequences of the purchaser’s own failure to fulfil the agreement of purchase and sale). The initial summary judgment motion focused on the breach of the contract and an assessment of damages. 

The motion judge assessed the damages incurred by the vendor at $234,849.18. Regarding the purchaser’s claim for relief from forfeiture, the motion judge considered both principles of proportionality and unconscionability. The motion judge found that the deposits, which were equivalent to approximately 5.5% of the purchase price, were both commercially reasonable and proportionate to the vendor’s actual damages. The motion judge did not find evidence that the vendors acted unreasonably, nor was there evidence to suggest unequal bargaining power between the parties.

As a result of these findings, the motion judge denied the purchaser’s request for relief from forfeiture and ordered that the vendor was entitled to keep the $400,000 in deposits.

Court of Appeal: Vendor Entitled to Sale Price Even Without Holding Title

The purchaser appealed the motion judge’s findings and claimed that damages should have been reduced by two-thirds given that the corporate vendor was only a one-third owner of the property. 

Upon review, the Court of Appeal found that while the individual property owners were not parties to the agreement of purchase and sale, had the transaction closed, the corporate vendor would have been entitled to receive all of the purchase funds and deliver property title to the purchaser. Therefore, the Court disagreed with the purchaser’s argument that the award should be reduced by two-thirds. 

The Court went on to state that:

“All that is necessary for a vendor to be entitled to the sale price is that they be in a position to ensure that good title is conveyed to the purchaser, even if they do not technically hold that title themselves.” 

Purchaser Assumed Risk of Failed Purchase By Waiving Financing Condition

On appeal, the purchaser claimed that the motion judge erred by finding that the purchaser should have foreseen the potential risk due to the pandemic when the financing condition was waived. However, the Court of Appeal affirmed the motion judge’s finding that by waiving the financing condition, the purchaser assumed the risk of the transaction not closing. 

The purchaser further argued that the motion judge erred in finding that neither side provided evidence of the parties attempting to salvage the transaction when there was evidence of attempted negotiations. However, the Court of Appeal noted that the motion judge had stated that the purchaser provided no information about any negotiations. Further, the motion judge pointed out that it was unusual that the purchaser’s counsel did not offer the corporate vendor compensation in return for the six-month extension requested.

As a result, the Court of Appeal found no error in the motion judge’s analysis or his decision not to grant the purchaser relief from forfeiture. 

Campbell Litigation Provides Clients With Experienced Advice on Commercial Real Estate Disputes

At Campbell Litigation, our real estate team helps clients in the Kitchener-Waterloo area work through the complexities which can accompany commercial real estate transactions. We have extensive experience representing clients in litigation involving abandoned deals, misrepresentation, and negligence. Our lawyers work alongside vendors and purchasers to help protect their rights. Whether you are seeking general compliance advice or are dealing with a specific dispute, we can help. Contact us online or call us at 519-886-1204 to speak with a member of our team to discuss your options.