Since 2014, the Supreme Court has released a trilogy of cases finding and expanding on the duty of good faith in contractual performance. Parties to an agreement of purchase and sale are under a duty to act in good faith and have an obligation to take all reasonable steps to complete the contract.1 The majority of real estate contracts have clauses providing that time is of the essence. This article considers whether the duty of good faith changes parties’ obligations on closing of a real estate transaction. When faced with a request to extend the closing date, is the counterparty obliged by the duty of good faith to agree? Is time still of the essence?
The Concept of Good Faith in Contractual Performance Continues to Expand
In 2014, the Supreme Court in Bhasin v. Hrynew recognized a duty of good faith in contractual performance that requires parties to “perform their contractual duties honestly and reasonably and not capriciously or arbitrarily”.2 In 2020, the Supreme Court held in C.M. Callow Inc. v. Zollinger that the duty to act honestly in the performance of the contract precludes active deception.3
In February of 2021, the Supreme Court in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District4 held that where a party to a contract exercises its discretion unreasonably, that is, in a manner not connected to the underlying purposes of the discretion granted by the contract, its conduct amounts to a breach of the duty to exercise contractual discretionary powers in good faith.5
The General Principle: No Obligation to Agree to Extensions of the Closing Date
In Deangelis v. Weldan Properties Inc.,6 the parties entered into an agreement for the sale of a pre-construction townhome. The agreement contained a time of the essence clause. On July 13, 2016, the purchaser took possession of the property by way of interim occupancy. After the interim occupancy, the balance of the purchase price was to be provided on August 23, 2016, the closing date.
On closing, the purchaser advised the vendor that it would not have the necessary funds to complete the purchase of the townhome that day, and that the funds would be received within the “next few days”. The purchaser sought an amendment to the agreement to extend closing by three days. The vendor took the position that the purchaser had anticipatorily breached the agreement, which entitled the vendor to terminate the agreement and forfeit the deposit.
In the lawsuit that followed, the purchaser argued that the vendor arbitrarily exercised the time is of the essence clause, despite knowing that the closing would take place no more than three days later and that the reason the agreement did not close was due to the vendor’s exercise of a discretionary term that was taken in bad faith.
At trial, the judge held that there was no evidence of bad faith on the part of the vendor in the performance of its obligations under the Agreement. Reviewing Bhasin v. Hrynew, the Court concluded that the obligation to act in good faith does not go so far as to re-write the agreement for the parties. Insisting on compliance with the agreed upon terms of the agreement is not, without more, an act of bad faith.7
Recent decisions following Deangelis in Ontario have been equally clear. There is no obligation to agree to an extension of the closing date,8 and absent other circumstances, it is not an act of bad faith to insist the closing of a transaction take place on the closing date.
” In Scott and Brav-Baum v. Forjani,9 the purchaser asked several times for an extension to the closing date. The vendors counter-offered with shorter extensions, but the parties did not agree. On the closing date, the purchaser delivered a letter stating she could not close because of serious deficiencies with the property. The vendors disputed the basis for failure to close and put the purchaser on notice that she had breached the agreement. The Court held that the purchaser breached the contract and forfeited her deposits.10
” In Nutzenberger v. Mert,11 the purchaser requested an extension five days before closing. The vendors rejected any extension. The Court held that it was “obvious” that the purchaser was not going to close the transaction because of, inter alia, communications that he was not going to close, and his request for an extension prior to the closing date. The Court held there was no doubt that the vendors were innocent parties and the purchaser was in default.12
” In 2100 Bridletowne Inc. v. Ding,13 an issue arose as to whether a vendor was obliged to offer an extension. The Court concluded that where the purchaser fails to close, even when the parties discussed the possibility of extension, the purchaser is in default and must forfeit the deposit.14 In this case, the plaintiff vendor was the innocent party, and was not obliged to offer the extension.
The Exceptions: When The Agreement of Purchase and Sale is Ambiguous on the Closing Date
Vague or unclear agreements make for nuanced and sometimes confusing decisions because of the specific context in which the dispute arises.
In Ju v. Tahmasebi,15 the parties had entered into a real estate transaction which did not have a specific closing date as the transaction was contingent on the outcome of a severance application to be brought by the vendor. The agreement required the purchaser to make a second deposit after the vendor provided evidence of severance approval to the purchaser’s lawyer, with the closing date to occur 60 days after the vendor received the separate deed from the municipality. The agreement stated that time was of the essence.
The vendor obtained the severance on December 15, 2017, but did not advise the purchaser (despite 5 written inquiries from the purchaser) until March 12, 2018. On June 27, 2018, the vendor advised the purchaser that the application had been granted, requested the further deposit, and advised that the closing date was in 60 days (September 27, 2018). The purchaser requested an extension to close on the basis that the agreement had been outstanding for over two years and the purchaser was out of the country. The vendor refused, insisted that the second deposit be paid, and ultimately advised the purchaser that it was in default and terminated the agreement.
The application judge relied upon established case law which holds that where a party has not acted in good faith, it cannot rely upon a “time of the essence clause”.16 In that context, the Court held (and the Court of Appeal later agreed) that the vendor had violated its duty of good faith by failing to agree to a reasonable extension request.
This case turned on the specific fact that, in light of the matter’s history, the vendors behaved unreasonably when faced with a request for an indulgence. That finding is fixed in the vendors’ behaviour in the months preceding their sudden insistence upon payment of the second deposit (ignoring the purchaser’s requests for an update; the vendor’s withholding of information),17 especially because there was nothing in the agreement demanding the payment by a specific date or within a specific time.
On appeal, the Court deferred to the application judge’s conclusion that it was a violation of the principle of good faith to proceed as the vendors did, i.e. to ignore the respondent’s repeated requests for an update for many months, withhold critical information about the city approval, and then demand immediate payment by an arbitrarily set date when the respondent said she was not in a position to pay because she was out of the country and needed an indulgence.18
At first blush, Ju may appear to suggest that the failure to agree to a reasonable extension request is a failure of the duty to act in good faith. However, Ju was distinguished in Christine Elliott v. Saverio Montemarano.19 In Montemarano, the vendor claimed that the purchaser breached the agreement of purchase and sale by failing to complete the transaction. The purchaser requested, and the vendor agreed to, many extensions of the closing date. Finally, the vendor was not prepared to provide any additional significant extensions without the payment of an additional deposit, which the purchaser refused to provide. The vendor tendered, and the purchaser failed to close.20
The Court held that unlike in Ju, the parties in Montemarano had a specific closing date defined in the agreement and there was no evidence that during the performance of the agreement, the vendor had failed to act honestly or failed to provide the purchaser with any information necessary for him to perform his obligations.21
Montemarano, in following Deangelis, confirms this simple principle: insisting on compliance with a term of the agreement of purchase and sale is not, absent other circumstances, an act of bad faith. Ju should not be taken as imposing a new obligation to agree to extensions of time where agreements have fixed closing dates.
Conclusion
The duty of good faith has not changed the ordinary operation of real estate contracts with fixed closing dates. The obligation to act in good faith does not go so far as to rewrite the agreement for the parties.22 Where a party advises they cannot close and seeks an extension which is not granted, that party is the defaulting party when the transaction fails to close.23
However, where an agreement of purchase and sale does not have a fixed closing date, this creates ambiguity and room for interpretation on the reasonableness of the actions of the parties in their negotiations and whether those actions were in good faith.
Footnotes
1 Jongazma v. Primont Homes (Heritage Hollow) Inc., 2011 ONSC 7091 at para. 50.
2 Bhasin v. Hrynew, 2014 SCC 71 at para. 63.
3 C.M. Callow Inc. v. Zollinger, 2020 SCC 4 at para. 5.
4 Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7 [Wastech].
5 Wastech, at para. 111.
6 2017 ONSC 4155 [Deangelis]
7 Deangelis, at para. 38.
8 Wilson v. Upperview Baldwin Inc., 2019 ONSC 4013 at paras. 34-39.
9 CarswellOnt 24288 at paras. 26-38 [Forjani].
10 Forjani, at paras. 26-38, 42-43, 54-65.
11 2021 ONSC 36 [Nutzenberger].
12 Nutzenberger, at paras. 17, 19, 42, 53.
13 2021 ONSC 2119 [Ding].
14 Ding, at paras. 66-67.
15 2019 ONSC 5821, aff’d 2020 ONCA 383 [Ju].
16 Ju, at para. 36.
17 Ju, at para. 23 (Ont. C.A.)
18 Ju, at para. 24 (Ont. C.A.)
19 2020 ONSC 6852 [Montemarano]
20 Montemarano, at paras.
21-24. 21 Montemarano, at paras. 64-66.
22 Deangelis, at para. 38.
23 Nutzenberger, at para. 36
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
