Failure To Close An Agreement Of Purchase And Sale In The Context Of COVID-19 The COVID-19 pandemic has lead to noticeable changes in the real estate market in the GTA as well as to a general recession, according to Statistics Canada. While detached houses and living space in the suburbs in general increased in value, smaller living spaces such as condominiums are in very low demand. Purchasers who entered into an Agreement of Purchase and Sale (APS) may no longer be able to secure financing for the property. This may be due to the recession and/or the purchaser’s loss of employment between signing the APS and the closing date. The consequences of a failure to close on an APS were previously addressed in detail here. Consequences of failure to close In brief, the consequences for the purchaser who fails to close are as follows: the purchaser will likely forfeit their deposit; the purchaser may also be liable for the difference in value between the purchase price agreed upon in the APS and the re-sale price the vendor can obtain, less the amount of the forfeited deposit; the purchaser furthermore can bear liability for the vendor’s costs until the re-sale, for example, gas, hydro, taxes, etc. as well as interest and other consequential losses the vendor suffered if the vendor was relying on the money from the purchase to buy another property. Legal considerations A change in the market conditions or loss of employment does not constitute a legally valid reason not to fulfill the obligations arising from the APS. Generally, there is no frustration of contract or force majeure at work. Frustration A contract is frustrated when a supervening event has occurred after entering into the contract, without the fault of either party, which renders the performance of the contract substantially different than the parties had bargained for (Bang v. Sebastian, 2018 ONSC 6226). The event must have been unforeseeable. The courts have held that parties to an APS know that market prices can go up and down. While the magnitude of the downturn may have been unexpected, that does not render it unforeseen. It also does not alter completely the nature of the APS (Paradise Homes North West Inc. v. Sidhu, 2019 ONSC 1600). Force Majeure In Paradise, the purchaser also argued the defence of force majeure. The court did not assess the merits of this defence. In fact, this defence is rarely litigated. One reason is that there is no common law doctrine of force majeure. This defence can only be brought forward if the contract explicitly provides for it. Such a clause would often provide that the parties are relieved from their contractual obligations when an unexpected, external event has occurred that prevents the parties from performing their obligations. Recent Case Law The recent Ontario case law concerning breach of an APS in the COVID-19 context does not address the defence of force majeure. Since there is no common law doctrine of force majeure and given its relatively low success rate in courts, frustration is predominatly the defence of choice. However, frustration, has not yet been found to relieve a party from the obligations of an APS due to the ongoing pandemic. Two cases before the Superior Court of Justice are illustrative. In FSC (annex) Limited Partnership v. Adi 64 Prince Arthur L.P., 2020 ONSC 5055, a commercial real estate case concerning a condominium project in Toronto, the respondent argued that difficulties obtaining financing during the COVID-19 crisis frustrated the shotgun provision under which the respondent had previously elected to purchase the applicant’s interest in the project. This argument failed. While this case is not a classic APS case, it still clearly demonstrates that the court is not easily persuaded that a recession justifies a finding of frustration. The court said: “If decreased liquidity was tantamount to frustration, it would mean that a large number of contracts for which parties required financing would be frustrated in every recession.” The second case relevant in this context is Burrell v. Burrell, 2020 ONSC 3269. In this case, one of the selling spouses unilaterally decided to refuse to sign the closing documents for the former matrimonial home in the course of the divorce, calling upon the pandemic and the health risks the moving arrangements would involve. The court found that the spouse’s argument would not render litigation successful with the purchasers of the house, implying that the APS would not be frustrated due to the pandemic’s health risks. Therefore, the other spouse was permitted to sign the documents for both spouses, so that the obligations under the APS would be honoured. Lessons to be learned The ideal course of action is to include a clause in the APS that makes the APS contingent on the purchaser’s ability to obtain the necessary financing to close the transaction. In the reality of a competitive real estate market, this option will not always be available to the purchaser. A second option, subject to the same flaw, is to include a force majeure clause in the APS. This needs to be individually negotiated because most real estate agents use the Ontario Real Estate Association’s (OREA) standard APS form for residential transactions, which does not include a force majeure clause. Furthermore, the effects of COVID-19 are raising novel issues that have not yet been fully canvassed by courts, and whether such a clause would be successful in allowing a purchaser to pull out of an APS due to financing issues or other issues relating to COVID-19 would remain to be determined. As mentioned above, the precise language will be important when the buyer has to convince the court that performance was truly impossible and that COVID-19’s impact on the real estate market was unforeseeable. If you require legal advice on a commercial litigation matter, such as the above, feel free to reach out to DSF lawyer Stephanie Turnham under 289-638-3182 or stephanie.turnham@devrylaw.ca “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” By Fauzan SiddiquiBlog, Commercial Litigation, COVID-19November 27, 2020December 17, 2020
Involved in a Commercial Real Estate Transaction? Make Sure You Complete Your Due Diligence with Respect to Environmental Issues Due diligence is an essential part of any real estate transaction. In a residential real estate transaction, searches are typically performed to determine if there are any issues with respect to title, encroachments, work orders, open building permits, arrears in taxes or utility bills, and writs against the seller. Of course, every property is unique and additional searches may be required depending on the particular situation. In a commercial real estate transaction, it is important to conduct searches for not only the above-mentioned issues but also for additional matters that can especially affect commercial properties. Failure to conduct proper due diligence can expose the purchaser to significant liability. In today’s post, we will focus on liability for environmental issues and how you, as a purchaser of a commercial property, can take steps to protect yourself.Environmental LiabilityUnder Ontario’s Environmental Protection Act, RSO 1990, c E.19, current and former owners of a property can be held liable for environmental contamination, whether or not they are actually responsible for causing the contamination. In Hamilton Beach Brands Canada Inc v Ontario (Environment and Climate Change), 2018 ONSC 5010 (Div Ct) (leave to appeal to ONCA denied), the current owners and tenants of property were held liable for contamination that occurred at the hands of a former tenant decades earlier. As seen in the case of Midwest Properties Ltd v Thordarson, 2015 ONCA 819 (leave to appeal to SCC denied), corporate ownership of a property will not necessarily protect individuals from being held personally liable. Courts are willing to pierce the corporate veil and hold directors and officers liable for environmental contamination pertaining to properties owned by their respective corporations. Furthermore, a government order to remediate a property does not preclude a civil action for damages from owners of neighbouring properties that may be affected by the contamination.How Can You Protect Yourself?Before purchasing a commercial property, it is important to thoroughly investigate the history of the property and determine if it is possible that contamination occurred on the property at any time in the past. This may require determining all the previous owners and uses of the property. The Ontario Ministry of the Environment, Conservation and Parks (MECP) should be contacted to determine if there are any records of contamination relating to the property in question. If there are any storage tanks on the property, their history should be investigated. Since 2002, all underground fuel storage tanks must be registered with the Technical Standard Safety Authority, and larger tanks require annual testing. In some cases, it may be necessary to perform a Phase I or even a Phase II Environmental Site Assessment (ESA) to determine if any contamination exists on the property, either above or below the surface or in the groundwater. If there are plans to change the use of a property, the MECP may require that a Record of Site Condition be filed which in turn requires completion of an ESA.If you have any questions regarding liability for environmental contamination or environmental due diligence that should be completed prior to purchasing either a residential or commercial property, please contact Laura Rosati, Commercial Real Estate Lawyer at Devry Smith Frank LLP, at 289-888-6643 or laura.rosati@devrylaw.ca “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” By Fauzan SiddiquiBlog, Real EstateNovember 4, 2020March 20, 2024
Title Insurance Providers Introduce Increased Protection for Lenders from Super Priority Liens and Deemed Trusts The recent decision of the Federal Court of Appeal in Toronto-Dominion Bank v Canada, 2020 FCA 80 (“TD v Canada”), created a new cause for concern for lenders. The facts of the case are as follows: In 2007 and 2008 the debtor, before becoming a customer of the Toronto-Dominion Bank (“TD”), failed to remit to the Receiver General of Canada over $67,000 worth of GST in relation to his business. In 2010, TD extended a loan and a line of credit to the debtor, both of which were secured against a property owned by the debtor. In 2011 the debtor sold the property in question and repaid the loan and line of credit. TD then discharged all charges registered against the property. Two years later, the Canada Revenue Agency (the “CRA”) commenced a deemed trust claim under Section 222 of the Excise Tax Act, RSC 1985, c E.15 (the “Act”) on the basis that the unremitted GST amounts constituted a deemed trust and the proceeds from the sale of the property should have been paid to the Receiver General before they were paid to anyone else. At trial, the Federal Court (2018 FC 538) held that the unremitted GST amounts were indeed subject to the deemed trust provisions of Section 222 of the Act, and, because the deemed trust existed before TD registered its security interest against the property, the CRA had a super-priority lien on the sale proceeds of the property. TD was therefore obliged to remit the amount of the GST debt to the CRA. The Federal Court of Appeal upheld this decision. Outcome This decision is worrisome to lenders for several reasons. First and foremost, amounts covered by the deemed trust provisions in the Act, as well as other amounts that result in a deemed trust, such as pension deductions that an employer fails to remit under Section 227 of the Income Tax Act, RSC 1985, c1, are not registered on title to a property. Therefore, it is often very difficult to determine if a deemed trust exists at the time a lender seeks to register a security interest against a property. Despite this, if a deemed trust is later found to have existed before a security interest was registered against a debtor’s property, the amount subject to the deemed trust will form a super-priority overpayment made to the lender. This includes payments made from the proceeds of the sale of the secured property. The amounts in question can be significant, and these claims can be brought forward many years after a property has been sold and the security interests discharged. Title Insurance While title insurance has, for some time, offered protection against these types of super-priority claims, there is a caveat. Traditionally, coverage under a lender’s title insurance policy ends once the mortgage to which it applies is discharged and therefore, there was no protection for lenders with respect to super-priority claims made following such discharge. In response to TD v Canada, title insurers have begun to introduce new types of coverage for super-priority claims made up to ten years following the discharge of a mortgage. This coverage, with certain exceptions and limitations, gives lenders peace of mind that they are protected from super-priority claims made against them long after they have discharged their security interests against a property. The new coverage is available for both residential and commercial properties. For more information on title insurance protection for deemed trust amounts and super-priority claims, or on title insurance in general, please contact Justin Cooper, Commercial Real Estate Lawyer at Devry Smith Frank LLP, 416-446-3343, justin.cooper@devrylaw.ca “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” By Fauzan SiddiquiBlog, Real EstateSeptember 30, 2020July 5, 2023
Four things you need to know about “Time shall be of the essence” in real estate transactions (especially in a pandemic!) A contract of sale for a piece of real estate property will almost always expressly provide that time is of the essence. This clause means that you and the other parties in the agreement must be punctual and fulfill their obligations promptly. Otherwise, if you fail to perform in a timely fashion, the contract may end and you may be liable for damages. For example, if you change your mind about purchasing the property or cannot attain suitable funding in time for the closing date, you may be in breach and liable to the other parties. In other words, the deadlines are very important; missing them could cost you. You may need to pay for the other parties. Here are four things you need to know: Proceed diligently and in good faith Stay true to your word, secure funding, fulfil your obligations with diligence. Complete your obligations faithfully and do not interfere with the other party’s ability to fulfil their responsibilities. If you are uncertain about your obligations, obtain legal advice. How to rely on the clause If you want to rely on the clause to accuse another party of failing to live up to their obligations, you must demonstrate that you are ready, willing, and able to complete the agreement. In other words, if both parties are not ready to close on a real estate transaction, neither party can rely on the clause to bring an action for specific performance, damages, or termination of the contract. When the clause is negated By waiver. For example, if both parties agree to extend the closing date by two days then there is a waiver. In general, if one party in a contract takes action(s) to make it clear that the strict contractual provisions will not be enforced, the clause is waived in that instance. By-election: For example, if the buyer does not have the requisite financing completed on the closing date, the seller could agree to extend the closing date. In general, when one party breaches the contract and the other parties’ consent, the clause is negated by-election. How the clause is impacted by the Coronavirus pandemic (COVID-19) COVID-19 has disrupted the economy and caused some aspects of the institutions which help real estate transactions move along have temporarily scaled back or suspended their operations. Further, COVID-19 has caused financial hardships which also have the potential to delay real estate transactions. Delays may cause deadlines to be missed, and you do not want to be on the hook due to a delay caused by COVID-19. To ensure that your real estate deal is not held up by the pandemic, obtain legal advice to ensure you either: enter into agreements properly drafted with COVID-19 in mind, or that your existing agreement completes without delays caused by COVID-19. For more information or any other questions regarding real estate transactions, please contact our real estate lawyers today. Don’t delay, time is of the essence. “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” By Fauzan SiddiquiBlog, COVID-19, Real EstateAugust 18, 2020June 4, 2021
What is a Continuing Power of Attorney for Property? A Continuing Power of Attorney for Property is a legal document in which you can appoint a person or persons to act on your behalf (called an “Attorney”) with respect to your property and financial affairs. The document will allow them to make decisions for you if you become incapable of managing your financial affairs. *The term “Attorney” refers to the person or persons you have chosen to act on your behalf. He or she does not have to be a lawyer. WHO YOU CAN APPOINT AS YOUR ATTORNEY FOR PROPERTY You can choose anyone you want as your Attorney as long as he or she is eighteen (18) years of age or older. You can also choose multiple people to act. If you appoint more than one person, you can state that the Attorneys are to act “jointly” or “jointly and severally”. If the Attorneys are appointed “jointly”, this means that they will be required to act together at all times. If the Attorneys are appointed “jointly and severally”, this means that either of the Attorneys named can act independently. If you name the Attorneys “jointly”, the advantage is that there is always a second person “double checking”. A disadvantage of naming the Attorneys “jointly” is the lack of flexibility – say, for example, if one Attorney is temporarily unavailable because of vacation, the available Attorney will not be able to make any decisions without the second person. APPOINTING A TRUST COMPANY AS YOUR ATTORNEY FOR PROPERTY Some people prefer to appoint trust companies (many of the big banks offer trust services) because they are professional and impartial. WHAT HAPPENS IF THE PERSON YOU CHOSE IS DECEASED, IS INCAPABLE, OR DOES NOT WANT TO ACT AS YOUR ATTORNEY FOR PROPERTY? If two or more Attorneys act jointly under the Continuing Power of Attorney and one of them dies, becomes incapable of managing property, or resigns, the remaining Attorney or Attorneys are authorized to act, unless the power of Attorney provides otherwise. If only one primary Attorney was named, you can name a substitute Attorney, and the substitute can act. DATE OF EFFECTIVENESS OF THE POWER OF ATTORNEY FOR PROPERTY We generally recommend that the Power of Attorney give your Attorney legal authority as soon as the document is signed. However, you can specify otherwise in the document. For example, some people only want the document to be effective upon a specific date or specific event (such as the Attorney obtaining a letter from your family physician which states that you are mentally incapable and cannot manage your property). An advantage of giving your Attorney legal authority as soon as the document is signed is that your Attorney will not need to go through formal processes to prove to third parties, such as banks, that the Power of Attorney has come into effect. IS MY ATTORNEY ENTITLED TO COMPENSATION? Your Attorney is entitled to take payment at a rate set out by the law, unless you say otherwise in the Power of Attorney for Property. If you want to prohibit your Attorney from taking any payment or you want to set a specific amount yourself, you can do this by including specific instructions in the Power of Attorney for Property. FIVE FACTORS TO CONSIDER WHEN CHOOSING WHO YOU SHOULD APPOINT AS YOUR ATTORNEY FOR PROPERTY Choosing an Attorney for Property is an important decision as that person will have full access to your money and other property. Trustworthiness Is the person honest? Do you know the person well enough or long enough to trust them? Will this person act in your best interest? Does the person have personal issues such as financial or health concerns that may interfere with the management of your property? Reliability Can you rely on this person? Experience Does the person understand financial matters? Availability Does the person have the time to handle your financial matters? Is the person readily available and easy to contact? Does the person live nearby? Willingness Is the person willing to take on the responsibility? Does the person understand the duties and responsibilities involved in being your Attorney? For further information or to schedule a consultation regarding powers of attorney in Ontario please contact Vanessa Romanino of Devry Smith Frank LLP at 416-446-3348. “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” By Fauzan SiddiquiBlog, Wills and EstatesAugust 22, 2019July 10, 2023
