Condo Developer's Early Termination Provision Upheld: Lack Of Financing Options Enough Reason To Terminate Sales Agreements

Michael Binetti
May 13, 2019
Mondaq.com

To read or download the decision document in the article below, click on this link: http://www.mondaq.com/canada/x/805254/Arbitration+Dispute+Resolution/Condo+Developers+Early+Termination+Provision+Upheld+Lack+Of+Financing+Options+Enough+Reason+To+Terminate+Sales+Agreements

In Reddy v. 1945086 Ontario Inc., Justice Penny of the Ontario Superior Court of Justice (Commercial List), upheld the cancellation of sales agreements of condominium units on the basis that the developer could not secure acceptable financing.

605 purchasers of condominium units sued the vendor of a development in Vaughan, Ontario that was to be known as the Cosmos Towers. The cancellations triggered considerable media interest. They argued that the vendor wrongly terminated their sales contracts and that the vendor's claimed inability to secure acceptable financing for the project was not a valid reason for the cancellations.

By regulation, only prescribed conditions can be inserted into an agreement of purchase and sale for the benefit of the vendor with all others being deemed to be null and void. One such condition permitting an early termination of an agreement is the "receipt by the vendor of confirmation that financing for the project on terms satisfactory to the vendor has been arranged by a specified date". Moreover, the regulations require that the vendor "take all commercially reasonable steps within its power to satisfy" the early termination condition.

The actual addendum to the agreements of purchase and sale included the following language:

The Purchase Agreement is conditional upon receipt by the Vendor of confirmation that financing for the project on terms satisfactory to the Vendor has been arranged [...] the determination of the Vendor in its sole, absolute and unfettered discretion.

The purchasers did not challenge the reasonableness and good faith of the vendors' termination of the agreements on the basis that satisfactory financing could not be arranged after having taken all commercially reasonable steps.

At issue was whether the vendor improperly drafted-out the requirement to "take all commercially reasonable steps within its power to satisfy" the financing condition by inserting language into the addendum that it was in the vendor's sole, absolute and unfettered discretion to determine whether it could obtain financing. By doing do, the applicants argued, the whole clause was void and there was therefore, no ability for the vendor to cancel the contracts on this basis.

The motion judge commenced the analysis by reiterating that the Ontario New Home Warranties Plan Act, and its regulations, constitute consumer protection and remedial legislation. Where documents created pursuant to the Act could have two possible interpretations, the one more favourable to the purchaser should govern.

The inclusion of the "sole, absolute and unfettered discretion" language was found to be of no effect because the vendor did not have the ability to confer that right upon itself . The regulations that prescribed the language of the addendum required (a) that vendors take all commercially reasonable steps to satisfy an early termination provision and (b) prohibited the contracting-out of that condition. In that both the "sole, absolute and unfettered discretion" and the "commercially reasonable steps" clauses could not co-exist, the motion judge found that the requirement on the vendor to take all commercially reasonable steps would continue to apply on the basis that this construction of the clause was most favourable to the purchasers.

The motion judge did not accept the purchasers' argument that because the clause was defective, the entire financing condition must fail (with the desired result that being that the vendor could not terminate its sales agreements on that basis). First, doing so would be the opposite of the construction most favourable to the purchaser and would in fact, require the motion judge to adopt the most adverse construction of that clause. Doing do would also run afoul of the doctrine of contra proferentum, which holds that any ambiguity in the contract should be interpreted in favour of the purchasers in this instance. The motion judge re-iterated that the most favourable construction of the clause in question was one that required the vendor to take all commercially reasonably steps to obtain financing.

There were two other reasons upon which the motion judge relied in upholding the condition most favourable to the purchasers: first, his interpretation would maintain the lawfulness of the agreement, which is preferred to any interpretation that would make the agreement unlawful; second, to strike out the condition as requested by the purchasers would lead to a commercial absurdity in that vendors would be placed in a position where it might be impossible to fulfill the sales contracts without commercially viable financing. While the Act contemplated consumer protection, it did not do so to the extreme detriment of vendors; rather, the Act and regulations sought to balance competing rights. The motion judge noted that to adopt the applicants preferred interpretation and to strike-out the clause may in fact lead to less protection for the purchasers in that they would be stuck in a project with a higher risk of bankruptcy.