Real Estate Purchases: When the Deposit Becomes Non-Refundable
Subject to clauses, waiver or satisfaction of subject to clauses, deposits and when deposits become non-refundable are issues in contracts of purchase and sale that often become the subject of litigation and perhaps more often are not well understood by buyers and sellers. These issues were at the heart of the recent decision in 1050438 B.C. Ltd. v Penguin Enterprises Ltd., 2019 BCSC 2138 (CanLII).
In 1050438 B.C. Ltd, the buyer and seller entered a standard form contract for the purchase and sale of a hotel. A total deposit of $500,000 was provided in two steps and the contract was assigned to a new buyer shortly before the deal was set to close. By the time of the reported decision, the issue of the deposit was the only remaining issue in the dispute to be adjudicated.
The seller’s position was that it was ready, willing and able to close, but that the buyer failed to pay the remainder of the purchase price or execute the closing documents. The seller further submitted that, as a result, the buyer had repudiated the contract and the seller was entitled to terminate the contract and retain the deposit.
The buyer’s position was that the seller failed to deliver an environmental report required by a subject to clause. The buyer further submitted that it never waived the condition for the seller to provide the report. As such, the buyer’s position was that the seller breached the sales agreement.
Having found that the matter was suitable for summary trial, the court then analyzed the material terms of the subject contract. The contract included the standard term that time would be of the essence and a clause that made the contract subject to, among other things, the seller providing a copy of a stage 2 environmental report within 14 days of the acceptance of the offer of purchase and sale. By addendum, the parties agreed that several of the subjects were satisfied, but there was no mention to the stage 2 environmental report condition being removed.
The court found that there has been no waiver of the requirement to provide a stage 2 environmental report despite the contract being clear and unequivocal that the seller had an obligation to provide the report. The seller failed it its obligations and the Court rejected submissions that there were clerical errors in the addendum which removed the other subject-to conditions. The court held that the clause to provide a stage 2 environmental report to be reasonable in a commercial real estate transaction of the value in question.
The court went on to examine whether the buyer had waived the condition of provision of the environmental report. Turning to case law the court held that the analysis of whether a party has waived a condition by conduct may be summarized as follows:
- the party alleged to have waived must be demonstrated to have full knowing of its rights;
- the party alleged to have waived must be demonstrated to have unequivocally and consciously abandoned its rights;
- the overring consideration is whether the clear intention to waive was communicated to the other party; and
- the onus is on the party alleging the waiver to establish the wavier in evidence.
The court did not accept that the seller advising it did not have the environmental report and the buyer indicating it intended to secure a report of its own as a waiver of the obligation of the seller to provide the report. Rather, the court found that the parties remained at odds over the report and the buyer’s intention to get a report of its own was an indulgence, not a waiver.
The court found that the seller breached the contract and remained at breach at the time of closing. The buyer did not reject the contract but attempted to keep it alive through negotiating an extension of closing. The seller erred by attempting to take the position that the buyer was in breach of the contract when it refused to complete while the seller had yet to satisfy its obligation to provide the stage 2 environmental report. As stated by the court: “… the Seller cannot complain of the wrongdoing of the Buyer when he was in default under the contract…. the Seller jumped the gun by terminating the contract.”
Having made the findings it did, the court ordered that the $500,000 deposit be returned to the buyer.
1050438 B.C. Ltd. v Penguin Enterprises Ltd. underscores the importance of parties properly considering the effects and meaning of subject-to clauses. Such clauses are not mere formalities that can be lightly treated but have effect on what obligations a party is entitled to perform and when and when deposits become forfeit or a party is obliged to complete a purchase or sale.
When a purchase and sale agreement is collapsing, parties need to carefully consider the terms of the contract and their past conduct to understand what obligations may or may not continue to exist and what their options are. The actions taken and what things are communicated can have substantial and irretractable effects on what rights may continue to exist or be terminated. It is recommended that parties to complex purchases or any party to a collapsing or potentially collapsing purchases of real property seek timely and competent legal advice.