The Latest on Creative (but Unsuccessful) Attempts to Get Out of a Really Bad Real Estate Deal

In the recent case of Forest Hill Homes (Cornell Rouge) v Peimian Ou, Mr. Justice Morgan of the Ontario Superior Court dealt with a summary judgment motion relating to an aborted real estate deal.

In this case, Ou agreed to purchase a home to be built from the plaintiff, Forest Hill Homes, for about $1.7 million. Ou provided deposits that added up to over $100,000 and, on closing, had to come up with almost $1.6 million to close.

On that day, Forest Hill Homes was ready to close the transaction, but Ou did not have sufficient funds.

This apparent breach of contract led to a lawsuit and ultimately to a motion for judgment brought by Forest Hill Homes.

At the motion, Ou brought out a series of arguments in an attempt to concoct a defence to what seemed to be an indefensible position.

Firstly, he argued that his performance of his obligation to close was made impossible by a drastic and unforeseeable drop in the real estate market. This, in turn, made it impossible for him to obtain the required financing. Accordingly, the contract was frustrated and Ou should be relieved of the obligation to close.

In fact, the property which he had agreed to purchase for over $1.7 million was, as at the date of the motion, worth just over $1 million. The fact that the real estate market had dropped significantly could not be challenged. However, and not surprisingly, the Court ruled that this did not amount to a frustration of contract. For a contract to be frustrated, there must be a radical change that transforms the nature of the contract. Here, the parties had intended that the property be sold for an agreed-upon sum. These were the essential terms of the contract and they did not change because of a drop in the market.

Ou then argued that the plaintiff’s sales agent had misrepresented the sale to them. The alleged misrepresentation took the form of the sales agent describing the deal as “the opportunity of a lifetime.” Supposedly this was said to Ou on the day that he signed the agreement of purchase and sale.

This language has been put forward in Court as a basis for a claim of misrepresentation on numerous occasions. It never works. The Court of Appeal has made it clear that to have an effect in law, a representation must be in respect of an ascertainable fact and not a mere opinion. A statement of opinion, judgment, probability, or expectation, or as merely a loose conjectural or exaggerated statement, does not count. This is because the person hearing the statement is not justified in relying on it.

Therefore, even if the sales agent did make that statement, it could never amount to an actionable misrepresentation.

Furthermore, and as is usually the case, the sales agreement contained a clause that made clear that any pre-contractual representation could not be relied upon.

Finally, Ou claimed that he had paid a bribe to the agent to jump the queue of potential purchasers and sign the sales agreement quickly. He argued that this excused his failure to close. In fact, there is no authority in Ontario for the proposition that a person who pays a bribe can have the contract rescinded as a result. In fact, the authorities are clear that it is the defrauded principal of an agent who takes a bribe, not the party paying the bribe, who can have the contract rescinded for that reason.

The last interesting point arising from this case has to do with the plaintiff’s claim for interest.

The agreement of purchase and sale provided that the plaintiff could charge interest in the amount of 20% of the purchase price if Ou failed to pay the balance due on closing. Ou argued that this was excessively onerous and ought not to be enforceable.

Our Court of Appeal has made it clear that a surprisingly onerous term of a contract may be unenforceable if it cannot be presumed that the non-drafting party had actually agreed to it. In other words, a stringent and onerous provision can only be relied upon if the party seeking to do so can show that reasonable measures were taken to draw the terms to the attention of the other party.

In this case, there was no evidence that this particular provision had been drawn to Ou’s attention when he signed the agreement of purchase and sale and accordingly, the plaintiff was unable to enforce it.

At the end of it all, judgment was awarded against Ou for over $500,000, being the difference between the purchase price and the value of the property at the time of the motion. In addition, he forfeited his deposits.

This would seem to be a rather extreme consequence arising from a drop in the real estate market, but unfortunately for Ou, that is simply how the numbers turned out.

“Hard and Pointed” Conduct Does Not Pay

The recent decision of the Ontario Court of Appeal in High Tower Homes Corporation v. Stevens is a useful illustration of the extent to which the court will go to deprive a party of relief where that party has acted in a way which some might consider unfair, even if the conduct was not unlawful.

In this case, a vendor owned two adjacent properties. One contained the principal residence of the vendor and his wife. They decided to sell the properties together, having decided that doing so would maximize their value.  For tax planning purposes, they wanted to allocate as much of the total purchase price for the properties as possible to one containing their personal residence.

The purchaser, a builder, submitted offers to buy both properties. The first offers contained conditions that made the sale of each property conditional on the sale of the other. After a series of revised offers went back and forth, the purchaser revised the offer for the parcel that did not contain the principal residence to provide that the sale of that property was not conditional on the sale of the property containing the principal residence. That change was not black-lined or otherwise drawn to the vendor’s attention. No such change was made to the corresponding clause in the offer involving the principal residence. The vendor did not notice the change.

As the vendor had preferred, the bulk of the amount offered for the properties together was attributed to the property containing the principal residence.

The agreement for the property that did not contain the principal residence had a clause making the purchaser’s obligation to close that purchase conditional on a variety of items.  The clause indicated that if the conditions were not waived by a particular time “by notice in writing to the seller”, the agreement would become null and void.

The two agreements were signed. On the deadline date for the waiver of conditions with respect to the property that did not contain the principal residence, the purchaser attempted to waive those conditions by delivering a notice to that effect to the vendor’s lawyer by fax.

By doing so, it appears that the purchaser tried to put into effect a plan that it must have concocted right at the outset. That plan involved purchasing the property that did not contain the principal residence at a bargain price while allowing the agreement for the other parcel, in respect of which the price was somewhat inflated, to go by the wayside.

As the Court of Appeal indicated, “the vendor was stunned when he learned of his mistake, and the purchaser’s attempt to take advantage to buy only Blue Water at a bargain price.”

The vendor refused to proceed. The purchaser sued for specific performance and in the alternative, damages of $5 million. The purchaser brought a motion for partial summary judgment.

The motion judge declared the agreement unenforceable on the very technical ground that notice of the waiver of conditions should have been delivered personally to the vendor and not by fax to his lawyer.

The purchaser appealed to the Court of Appeal, arguing in essence that the delivery of the notice by fax to the vendor’s lawyer was good enough based on a variety of legal doctrines.

The only doctrine that would appear to have had a glimmer of hope of success for the purchaser involved the equitable doctrines of waiver and promissory estoppel. The purchaser argued that by his conduct throughout, directly and through his lawyer, the vendor had demonstrated that he was not going to insist on strict compliance with the requirement that the purchaser’s notice in writing of its waiver of the conditions be delivered personally to the vendor. The purchaser argued that having been led to believe that strict compliance would not be required, he had somehow acted to its financial detriment in proceeding with the transaction, at least up to the date that the vendor pulled the plug on it.  As a result, it would be unfair for the vendor to be able to terminate the deal.

The Court of Appeal dismissed these arguments for a number of reasons. Most interestingly, however, the Court of Appeal pointed out that promissory estoppel is equitable relief. Therefore, a party seeking to invoke it must show that its past record in the transaction is clean. In this case, the Court of Appeal stated that it would decline to grant relief to the purchaser in view of the purchaser’s conduct at the outset. The motions court judge had concluded that while the purchaser’s conduct in changing the condition clause without notifying the vendor was not equivalent to fraud, the purchaser must have known that it was important to the vendor that the properties be sold together. The motion judge characterized the purchaser’s conduct as “hard and pointed”. Given that conduct, the purchaser was held not to be entitled to equitable relief.

The law now appears to be clear that there is a duty of good faith on parties to a transaction in terms of the manner in which they deal with each other after an agreement is made. There is no such duty on parties before they enter into a transaction.  Accordingly, this purchaser’s conduct during the negotiation process was not unlawful.  However, as it learned the hard way, conduct that might be characterized by a court as “hard and pointed” – to say the least – may well give rise to a negative result in court later on.