At what point in time should a developer terminate a pre-construction Agreement of Purchase and Sale (APS) when a buyer breaches the agreement? Well, the Ontario Superior Court of Justice in Lucas v. 1858793 Ontario Inc. o/a Howard Park has said “within a reasonable time”. So what would be considered within a reasonable time?
In this case, Alexandre and Kelly Lucas signed a pre-construction APS in 2015 with 1858793 Ontario Inc. (185) to purchase a new condominium, Unit 421, at 38 Howard Park Ave. in Toronto. Between 2015 and 2018, the Lucases made all of the required deposits and paid monthly occupancy fees starting in April 2018. When the time to close the deal approached in February 2019, 185 terminated the APS arguing that the Lucases had breached the APS by leasing their unit to a friend, Duarte, from May to September 2018, without 185’s prior consent.
Indeed, the APS had a clause forbidding the Lucases to lease their unit without 185’s consent. The clause also indicated that if the Lucases breached the APS, the breach was incapable of rectification but that only 185 had a right and option of terminating the APS. In other words, only 185 had the right to treat the APS as terminated. 185 also took the position that it was entitled to keep all of the deposits. 185 then attempted to resell the unit to a related party but the Lucases placed an encumbrance on title, which prevented the sale from closing. The Lucases sued 185 and requested relief from forfeiture of their deposits and specific performance (return of the unit to the Lucases).
Did the Lucases breach the APS?
The court found that the Lucases did not breach the APS. The court noted that while the Condominium Act did not define the term “lease”, its common definition was a written contract, for a fixed period, permitting use of an asset. In this case, there was no written contract between the Lucases and Duarte, and, in fact, there was absolutely no evidence showing that the Lucases charged Duarte any rent. The court found that the terms of the APS did not prevent the Lucases from allowing their friends and family to stay in their unit.
If the Lucases did breach the APS, was 185 entitled to terminate the APS?
The court found that even if, hypothetically speaking, the Lucases did breach the APS, 185 was still not entitled to terminate the APS because 185 lost its right of termination. As a general rule of contract law, when an innocent party discovers a contractual breach, it has to elect either
a) to treat the contract as being in full force and effect or
b) treat the contract as being terminated. If the innocent party choses to terminate, it has to communicate such election to the wrongdoer within a reasonable time. The court found that 185 did not communicate its election to the Lucases within a reasonable time. The court noted that:
- 185 knew of Duarte’s occupancy from the outset in May 2018. For example, on May 3, 2018, the Lucases emailed 185 asking 185 which parking space their tenant could use;
- 185 took no steps to address Duarte’s presence over the course of the summer;
- It was only on Sept. 21, 2018 that 185 emailed the Lucases telling them that they were in breach of the APS and denied Duarte access to the unit. Moreover, this email did not treat the APS as terminated and instead advised the Lucases that they could cure the breach by signing off on deficiencies;
- Subsequent to this email, Duarte moved out. The unit remained unoccupied and 185 continued to collect the Lucases’ occupancy fees;
- Later on, in December 2018 and January 2019, 185 tried to use the alleged breach as leverage to not repair the Lucases’ bathtub. However, once again, 185 did not actually tell the Lucases that the APS was terminated;
- It was only weeks before closing, in Feb. 2019, that 185 advised the Lucases that the APS was terminated.
The court found that by not treating the APS as terminated and “incapable of rectification” when it knew of the breach, at latest, by Sept. 2018, 185 lost its right of termination.
What are the appropriate remedies?
Since 185 waived its right of termination, 185 did not have a right to keep the Lucases’ deposits. Moreover, the court ordered specific performance (the unit was returned to the Lucases). The court found that over four years the unit had increased in value significantly and, as such, the Lucases would not be able to find a reasonably comparable substitute property in this price range.
Additionally, if specific performance was not ordered in this case, then developers could be incentivized to terminate agreements in rising markets. The court declared 185’s purported sale of the unit to a related party as a sham intended to prevent the Lucases from acquiring title to the unit and in effect, reversed that sale.
In my opinion, the court acted fairly and equitably in this situation towards the Lucases. While they did not follow the APS to a fault, it was clear that 185 did not have a genuine intention to terminate the APS and merely used the Lucases’ breach as a bargaining chip to relive it of its own obligations to repair deficiencies.
In sum, an innocent party has an obligation to communicate, within a reasonable time, how it will treat a breach of an agreement. What “reasonable time” is will depend on the circumstances of each case but to stay on a safe side, an innocent party should communicate to the breaching party as soon as possible how it intends to proceed (that is, to continue with the agreement, even if in a modified form, or terminate it), failing which the innocent party may be prevented from relying on the breach to end the agreement between the parties.