To close or not to close?

or
Why I am happy I do not practice real estate law…

One of the more stressful situations that arises for people buying or selling real estate, and their lawyers, is the one where an Agreement of Purchase and Sale contains an inaccurate statement and a purchaser threatens to terminate the transaction unless he gets an abatement in the purchase price. 

Unfortunately, decisions about closing often have to be made very quickly and often without a fully developed set of facts to consider.

At this point, it could well be a matter of who blinks first.  If the transaction aborts, a lawsuit ensues, and the matter goes to trial, the party considered by the court to have been in the wrong could face a massive damages award.  Unfortunately, decisions about closing often have to be made very quickly and often without a fully developed set of facts to consider. 

Many of these circumstances come down to an interpretation as to whether the statement in dispute is to be considered a “condition” or a “warranty”. 

If a statement in the Agreement is considered to be a condition and the condition is breached by one of the parties to the transaction, the innocent party can elect to either walk away from the deal and sue for damages or close the transaction and sue for damages for the breach.  If the statement is considered merely to be a warranty, the innocent party must close and then sue for damages.  The innocent party may not walk away from the deal. 

The law is also clear that whether a term as a condition or a warranty does not depend on which label is put on it by the parties to the transaction.  It is the court, after looking at all the circumstances, which makes that decision.

The real source of the stress in all of this has to do with the fact that it can be very difficult for parties and their lawyers to predict whether or not they are dealing with a condition or a warranty.  Even judges do not always agree.  In a case which went to the Court of Appeal some time ago, an Agreement of Purchase andSale included a warranty that the building in question contained five apartments.  As it happens, the building and zoning by-law only permitted use of the property as a triplex, and not a five-plex.  The purchasers refused to close and sued for damages.  The majority of the Court of Appeal felt that this was merely a warranty, and that by closing the deal, the purchaser would still have obtained substantially the whole benefit which had been intended under the contract.  Having failed to close, the purchaser was deprived of damages.  The dissenting judge in the Court of Appeal disagreed and felt strongly that the clause was a condition.  To accept a triplex when the agreement was for a five-plex was like accepting a small Volkswagen when a big Mercedes was what had been agreed upon. 

In a more recent case, a purchaser agreed to buy two commercial office buildings in downtown Toronto for $24.5 million.  The agreement provided for certain elevator repair work to be completed before closing.  By the time the closing date came around, the work had not been done, but the vendors showed the purchaser copies of service contracts that had been entered into to complete the work for about $6,200.  The purchaser refused to close. 

At trial, the vendor argued that the term was only a warranty and that relative to the size of the transaction ($24.5 million) and the amount of the purchase price, the amount in issue ($6,200) was trivial.  The trial judge disagreed and considered the term to have been a condition precedent and since the vendor had not completed the work before closing as it had agreed to do, regardless of the amounts involved, the purchaser did not have to close. 

These cases were brought to my attention by partner, Reuben M. Rosenblatt, Q.C.  Reuben has been practicing real estate law for over 50 years during which time he has been awarded the Law Society Gold Medal for his outstanding work.  He has also taught real estate law for over 30 years.  He handed me these cases and walked away shaking his head.  If Reuben finds these outcomes difficult to predict, what chance do the rest of us have?

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