In commercial real estate transactions, conditions are often inserted in agreements of purchase and sale. The conditions can be absolute (comply exactly or else) or they can be diluted somewhat (comply in all material respects). Regardless of the nature of the conditions, disputes often arise about the following issues: was there compliance with the conditions, must the purchaser close, and what happens if the purchaser refuses to close? The case of Champlain Thickson Inc. v. 365 Bay New Holdings Ltd. [2007] O.J. No. 3254 (S.C.J.) dealt with all of these questions.
Agreement
The agreement had the following clause:
“4.2 The obligation of the Purchaser to complete … shall be subject to the following conditions precedent:
(f) by Closing, all of the terms, covenants and conditions of this Agreement to be complied with or performed by the Vendor shall have been complied with or performed in all material respects at the times contemplated therein.”
During the due diligence period, the appropriate authority (TSSA) indicated that the elevators had deficiencies. After substantial negotiation, the purchaser waived some of its conditions, but received, in an amending agreement, the following obligation from the vendor:
“5.7 The Vendor, at its sole cost and expense, covenants … as follows: With respect to the current outstanding orders from the Technical Standards and Safety Authority … pertaining to the operation and maintenance of elevators at the Properties, the Vendor shall perform or cause to be performed all work which is the responsibility of the owner of the Properties … and shall provide written confirmation from Technical Standards and Safety Authority that all final inspections have been completed, that such work has been completed to the satisfaction of Technical Standards and Safety Authority and that no outstanding compliance issues remain.”
By the date of closing, the vendor had received a quote of $6,200 to rectify the elevator deficiencies and had entered into a service agreement with a contractor to perform the work. Notwithstanding the vendor’s entreaties, on the closing date the contractor had not completed the work or, indeed, even started the work.
Negotiations
The parties had attempted to resolve the problem. The purchaser proposed an extension of the closing date and was willing to reimburse the vendor for its reasonable expenses incurred due to the extension. The vendor refused; it did not want to give an extension.
Then the purchaser proposed to extend the closing date for 15 days following receipt of the TSSA confirmation and to increase its deposit from $150,000 to $500,000. The vendor countered that it would give the 15-day extension; it would obtain third party (not TSSA) verification; and the purchaser would increase its deposit by $600,000.
There was no resolution, the parties tendered, and the purchaser sued, not only for the return of its deposit, but also for damages. It alleged tht it had a flip lined up that it could not complete.
Interpretation
The judge concluded that the vendor breached the conditions contained in the agreement as amended. The work had not been started by the closing date and, certainly, there had been no approvals. He dealt with the vendor’s contentions as follows:
1. There was no issue of materiality involved. It was not a question of how much work had been done because no work had been done.
2. There was no commercial absurdity in killing a $26 million dollar deal over a $6,000 issue because:
a) The parties were sophisticated and used legal counsel throughout. The purchaser required the vendor to complete only one item, the elevator deficiencies. When it executed the amending agreement, the vendor took a calculated risk that it could not comply with that item.
b) Since the parties themselves chose to make the item a condition, they decided that it was material, regardless of the dollar amounts.
c) The vendor took a “hard ball” approach and misconceived the nature and scope of its obligations. Simply entering into a contract does not constitute the completion of the work or the regulatory approval for the completed work.
Accordingly, the judge held that, since time was of the essence and the condition was unfulfilled at the closing date, the purchaser was not required to close the transaction and had a right to the return of the deposit.
Damages
The judge held that he would award damages to the purchaser only if “(i) the agreement expressly provides that the vendor will be responsible for specified costs incurred by the purchaser, or (ii) the vendor has not acted in good faith to satisfy the condition precedent.“
The agreement did not refer to damages in case of breach. It seemed to be couched in the language of a true condition precedent.
The second alternative deals with situations in which there is a condition precedent (e.g. obtain a severance) dependent on a third party and the vendor does nothing to satisfy the condition (e.g. obtain the necessary approvals). In these cases, a vendor is acting in bad faith.
The vendor in Champlain certainly attempted to have the work completed on time; unfortunately, it was unsuccessful in that attempt. Accordingly, the judge held that the vendor did not act in bad faith; it may have taken a misguided notion of its rights and obligations under the agreement, but that, in itself, was not bad faith.
The judge refused to allow the purchaser any damages.
Questions
You might ask, if the purchaser really had a flip lined up, why would it not take the vendor’s assurance that the work was going to be completed, hold back a substantial sum of money to bind that assurance, close the deal, and flip the property? Good question. The purchaser never demonstrated that it had a binding agreement for the flip; it was more conjecture than reality.
You might also ask, why didn’t the vendor take the purchaser’s offer to allow the vendor time to comply with the condition. We assume that the vendor thought that the purchaser was buying time over trivial complaints and wanted to force the purchaser’s hand. Unfortunately, in doing so, the vendor either did not understand the nature of its obligations or did not care. Either way, in hindsight, the vendor made a bad decision.
Conversely, the vendor may have made a good decision. If the vendor felt that property values were increasing at the time (2004), then it might not lose by failing to close. It could scoop the purchaser’s deposit and re-sell the property for more later. Of course, once the purchaser fought back, it might have been a good idea to re-think that strategy.