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
Small Business Evictions Banned in Ontario On March 19, 2020, two days after announcing a state of emergency due to the coronavirus pandemic, Ontario moved to temporarily protect residential tenants from eviction. The Landlord and Tenant Board suspended all eviction application hearings and the Superior Court of Justice ordered that no eviction orders shall be enforced. With 2.2 million Ontario workers directly affected by either job losses or reduced hours, this action provided Ontario renters—many of whom living paycheque to paycheque—with critical relief. However, by May 15, the Ontario government continued to resist calls to extend the same protection to small business tenants. In lieu of providing legal protection, the province instead encouraged “cooperation” and called on commercial landlords of small businesses to be fair, flexible, and leverage the Canada Emergency Commercial Rent Assistance (CECRA) program which would open for applications on May 25. CECRA provides eligible commercial landlords with unsecured, forgivable loans to supplement lost rental income from their small business tenants. Commercial landlords are eligible if their small business tenant(s) pay no more than $50,000 in monthly gross rent per location, generate no more than $20 million in gross annual revenues, and have experienced at least a 70% decline in revenue. To qualify, the commercial landlord must agree to reduce their small business tenants’ rent by at least 75% and agree to a moratorium on the eviction. As a result of the structure of CECRA, the relief is provided to commercial landlords—should they choose to apply—without direct protections for small business tenants. However, as of June 5, there were only 7,000 applications out of the province’s 418,000 small businesses. This figure, in combination with calls from advocacy groups to extend legal protections, resulted in the passage of the Protecting Small Business Act. The Act suspends evictions by commercial landlords who are not applying for the CECRA program despite their tenants being eligible for the program. Tenants and landlords can learn more about eligibility and the application process at ontario.ca/rentassistance. Applications are being accepted until August 31, 2020. “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-19August 5, 2020September 29, 2020
Weddings & Contract Frustration during Covid-19 WEDDINGS, CONTRACTS & COVID-19 Before entering into a marital contract, couples and newlyweds may enter into a number of other contractual relationships. From vendors for decor & entertainment to catering and venues, there are a number of legal implications to be considered when unforeseen circumstances arise and threaten to disrupt contractual performance. COVID-19 & WEDDINGS With COVID-19’s current impact on the airline industry with restrictions in place on international travel and upon large social gatherings, the wedding industry has experienced significant disruption. So what does that mean for wedding vendors, venues and couples facing wedding cancellations or postponements? FORCE MAJEURE “Force majeure” clauses generally discharge a contracting party from the obligation to perform when an unanticipated event, beyond the control of either party, renders performance impossible or significantly different than what was anticipated. Many commercial agreements contain “force majeure” clauses which provide for parties to be excused of their contractual obligations in the event of serious unforeseen circumstances. These clauses are applicable when unforeseen events, such as an “act of God”, government action or change in legislation takes place, so as to disrupt contractual performance. To be applicable, a force majeure clause has to be contained within the written contract. A party seeking to rely on a force majeure clause must first establish that the intervening event falls within the contract’s definition of force majeure. In most contracts, there typically is a list outlining specific triggering events and terminology that is covered. Some contracts contain broader catch-all phrases such as “other events beyond the reasonable control of the parties.” Such assessments would likely be conducted on a case-by-case basis and will depend on the language of the contract and the facts of each individual case. It is important to note that the party seeking to invoke a force majeure clause must establish that the event sufficiently impacted contractual performance. Some force majeure clauses set out the degree of requisite impact required for applicability, ranging higher standards of performance being “rendered impossible,” to lower standards such as performance being “delayed.” Where the requisite impact is not specified in the agreement, Canadian courts have typically applied a higher threshold. An event that has made the performance more costly or unprofitable is insufficient to trigger the application of a force majeure clause. THE DOCTRINE OF FRUSTRATION Frustration occurs where an event occurs after entering into a contract, which renders performance impossible or radically different than negotiated and goes to the very root of the contract. The doctrine of frustration may apply in situations where there is no force majeure clause contained in the applicable contract. It is not enough for a contract to simply become more onerous or more difficult to perform. Rather, a party must show that the original purpose of the contract has been undermined and it would be unjust for them to be bound to the contract under the existing circumstances. Where the doctrine of frustration is applicable, the effect of the doctrine of frustration is to discharge parties from their contractual obligations. Cases involving frustration are determined by the courts based on their specific facts. Given the significance of its impact, the threshold for establishing frustration is very high. VENUES & VENDORS Venues and vendors facing losses incurred due to business interruption as per COVID-19 are advised to reach out to their insurance providers to see if they are able to claim for any of their losses based on their insurance coverage. MITIGATION & COOPERATION FOR VENDERS AND COUPLES TO CONSIDER In any situation where losses are likely to be incurred, contractual parties have a duty to mitigate. Parties would be advised to consider and discuss any viable options if possible in regards to accommodations, rescheduling or postponements if available. Relying on force majeure and frustration claims should be viewed as a last resort where conversations and negotiations have stalled or broken down. As businesses begin to reopen and restrictions begin to ease, we encourage couples, vendors and venues to stay apprised of updates that impact the wedding industry. (Link here) For more complex issues and questions pertaining to wedding contracts with venues, vendors, or couples in relation to refunds, deposits or monies paid for weddings and other contracts – where performance is now in question as a result of COVID-19, please contact one of the lawyers at our firm to discuss your rights and options. “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-19July 3, 2020August 20, 2021
