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  • chair

    Chris Huband Blake, Cassels & Graydon LLP

    September 19, 2017

    Commercial Real Estate TRANSACTIONS 2017

    *CLE17-0090500-A-PUB*

  • DISCLAIMER: This work appears as part of The Law Society of Upper Canadas initiatives in Continuing Professional Development (CPD). It provides information and various opinions to help legal professionals maintain and enhance their competence. It does not, however, represent or embody any official position of, or statement by, the Society, except where specifically indicated; nor does it attempt to set forth definitive practice standards or to provide legal advice. Precedents and other material contained herein should be used prudently, as nothing in the work relieves readers of their responsibility to assess the material in light of their own professional experience. No warranty is made with regards to this work. The Society can accept no responsibility for any errors or omissions, and expressly disclaims any such responsibility.

    2017 All Rights Reserved

    This compilation of collective works is copyrighted by The Law Society of Upper Canada. The individual documents remain the property of the original authors or their assignees.

    The Law Society of Upper Canada 130 Queen Street West, Toronto, ON M5H 2N6Phone: 416-947-3315 or 1-800-668-7380 Ext. 3315Fax: 416-947-3991 E-mail: [email protected] www.lsuc.on.ca

    Library and Archives Canada Cataloguing in Publication

    Commercial Real Estate Transactions 2017

    ISBN 978-1-77094-823-6 (Hardcopy) ISBN 978-1-77094-824-3 (PDF)

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    Chair: Chris Huband, Blake, Cassels & Graydon LLP

    September 19, 2017 9:00 a.m. to 12:00 p.m.

    Total CPD Hours = 2 h 30 m Substantive + 30 m Professionalism

    Donald Lamont Learning Centre The Law Society of Upper Canada

    130 Queen Street West Toronto, ON

    SKU CLE17-0090501-A-REG

    Agenda

    9:00 a.m. 9:05 a.m. Welcome and Opening Remarks

    Chris Huband, Blake, Cassels & Graydon LLP

    9:05 a.m. 9:20 a.m. Letters of Intent and Other Preliminary Real Estate Arrangements

    Brennan Carroll, Borden Ladner Gervais LLP

    9:20 a.m. 9:30 a.m. Tips about Tricky Purchase Price Adjustments and How To Deal with Them

    Xue Yan, Borden Ladner Gervais LLP

    Commercial Real Estate TRANSACTIONS 2017

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    9:30 a.m. 9:45 a.m. Due Diligence Issues: Access, Deliveries, and Confidentiality Lanette Wilkinson, Stikeman Elliott LLP 9:45 a.m. 10:00 a.m. Interim Operation Before Closing: Things That Can Go Wrong Rod Davidge, Osler, Hoskin & Harcourt LLP 10:00 a.m. 10:15 a.m. Unable or Unwilling (The Unofficial Guide to Answering Requisitions) Simon Crawford, Bennett Jones LLP 10:15 a.m. 10:30 a.m. Coffee and Networking Break 10:30 a.m. 11:00 a.m. Lawyers Obligations in Sending, Receiving, and Holding Funds (30 m Professionalism )

    Jeffery Citron, DLA Piper (Canada) LLP

    Gary Goldfarb, Meyer, Wassenaar & Banach LLP

    Chris Huband, Blake, Cassels & Graydon LLP

    Michael Lieberman, Norton Rose Fulbright Canada LLP

    11:00 a.m. 11:15 a.m. Estoppel Certificates: What are They Good For?

    Absolutely Something! Melissa McBain, Daoust Vukovich LLP 11:15 a.m. 11:30 a.m. Effectively Allocating Post-Closing Risk.

    Daniel Schwartz, Lax OSullivan Lisus Gottlieb LLP

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    11:30 a.m. 11:45 a.m. Issues Concerning Third Party Reports: Surveys, Environmental Assessments, Building Condition Reports

    Simon Lam, Bogart Robertson & Chu LLP

    11:45 a.m. 12:00 p.m. Question and Answer Period

    12:00 p.m. Program Ends

  • 1

    Chair: Chris Huband, Blake, Cassels & Graydon LLP

    September 19, 2017 9:00 a.m. to 12:00 p.m.

    SKU CLE17-0090501-A-REG

    Table of Contents

    TAB 1 Letters of Intent and Other Preliminary Real Estate Arrangements 1 1 to 1 5

    Brennan Carroll, Borden Ladner Gervais LLP Mario Pedro, Associate, Borden Ladner Gervais LLP Anthony Deluca, Articling Student, Borden Ladner Gervais LLP

    TAB 2 Tips about Tricky Purchase Price Adjustments and How to Deal with Them 2 1 to 2 2

    Xue Yan, Borden Ladner Gervais LLP

    TAB 3 Agreement of Purchase and Sale Due Diligence Provisions Checklist .. 3 1 to 3 3

    Lanette Wilkinson, Stikeman Elliott LLP

    Commercial Real Estate TRANSACTIONS 2017

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    TAB 4 Interim Operation Before Closing: Things That Can Go Wrong ... 4 1 to 4 7

    Rod Davidge, Osler, Hoskin & Harcourt LLP

    TAB 5 Unable or Unwilling (The Unofficial Guide to Answering Requisitions) . 5 1 to 5 20

    Simon Crawford, Bennett Jones LLP

    TAB 6 Estoppel Certificates: What are They Good For? Absolutely Something! .. 6 1 to 6 10

    Melissa McBain, Daoust Vukovich LLP Kenneth Pimentel, Daoust Vukovich LLP

    TAB 7 Effectively Allocating Post-Closing Risk .. 7 1 to 7 4

    Daniel Schwartz, Lax OSullivan Lisus Gottlieb LLP

    TAB 8 Issues with Third Party Reports: Surveys, Environmental Site Assessment Reports and Property Condition Assessment Reports 8 1 to 8 17

    Simon Lam, Bogart Robertson & Chu LLP

  • TAB 1

    Letters of Intent and Other Preliminary Real Estate Arrangements

    Brennan Carroll, Borden Ladner Gervais LLP Mario Pedro, Associate, Borden Ladner Gervais LLP

    Anthony Deluca, Articling Student, Borden Ladner Gervais LLP

    September 19, 2017

    Commercial Real Estate TRANSACTIONS 2017

  • 1

    Letters of Intent and Other Preliminary Real Estate Arrangements

    Brennan Carroll, Borden Ladner Gervais LLP

    Introduction

    The first step in completing a commercial real estate transaction is typically the drafting of a letter

    of intent (LOI). While an LOI may appear to be a simple document, it is filled with legal traps that if

    missed, can have serious ramifications for the parties to a proposed transaction. An LOI, despite its

    brevity, must be drafted carefully and should be fully understood before being signed. Specifically,

    parties to an LOI must be aware of whether or not the LOI is drafted to be binding or non-binding. The

    distinction between a binding and non-binding LOI can easily become blurred when parties fail to

    explicitly state their intention in the LOI. As a result, parties can be left in a situation where an LOI they

    thought was non-binding, is actually binding (and vice-versa). Accordingly, it is important for parties

    entering into a proposed real estate transaction to be aware of the potential legal issues that can result

    from signing an LOI, as well as the drafting tips and strategies to ensure that their intentions are properly

    articulated.

    What is a Letter of Intent?

    An LOI is used by parties to a proposed real estate purchase and sale transaction to set out the

    principal terms of the proposed deal, as well as to facilitate the drafting and negotiation of the definitive

    purchase agreement. The LOI is typically an attempt to ensure there is a meeting of the minds on key

    business terms before the more detailed legal and less material business terms are addressed, which can

    be a time-consuming and expensive undertaking. An LOI is used to indicate a willingness to enter into a

    subsequent agreement or can also be used as a commitment to certain terms and obligations, regardless of

    whether a subsequent agreement is completed. An LOI will typically include information such as the

    proposed parties, timelines and important dates, confidentiality and exclusivity obligations, the purchase

    price, the form and timing of the purchase price, and the closing date.

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    Is a Letter of Intent Binding or Non-Binding?

    When drafting an LOI, an important consideration is whether it will be legally binding or non-

    binding. Typically, most provisions of an LOI will be non-binding and will be used to simply set out the

    parties intentions as a guide for negotiating the more formal and binding purchase agreement. It is

    common, however, for parties to draft an LOI that is generally non-binding, but includes certain

    provisions which are legally binding. For instance, a proposed buyer will want to include a binding

    exclusivity provision in an LOI to be sure that the proposed seller cannot shop the transaction around to

    another buyer. Additionally, if the parties have not already entered into a confidentiality agreement, the

    parties will want to ensure that the terms of the LOI remain confidential by including a binding

    confidentiality provision in the LOI.

    Parties to an LOI must ensure to explicitly state whether the terms of the LOI will be binding or

    non-binding. Failure to do so can leave open the possibility that the distinction between what is binding

    and non-binding becomes blurred. For instance, in Wallace v. Allen1, the court was tasked with

    determining whether an LOI for the share purchase and sale of four companies was binding or non-

    binding. The court looked at the language used in the LOI and the conduct of the parties prior to and after

    signing the LOI in determining that the LOI was in fact a binding contract.2 The court explained that the

    use of contractual type language in the LOI (such as reference to this agreement and statements such as

    it is agreed and upon acceptance) indicated an intention to be bound.3 While the LOI contemplated

    entering into a further agreement, it did not explicitly state that the LOI was subject to entering into that

    further agreement. The conduct of the parties also indicated that the LOI was intended to be binding.4

    Wallace began to work in the business immediately after signing the LOI and also began to incorporate

    1 Wallace v. Allen, 2009 ONCA 36 (CanLII). 2 Ibid at para 30-32. 3 Ibid at para 28. 4 Ibid at para 32.

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    his sons into the business.5 Allen also announced his retirement and the sale of the business, while

    introducing Wallace as the new owner.6

    Additionally, Hartslief v. Terra Nova Royalty Corporation7 provides guidance on what courts

    will consider in determining if an LOI is a binding contract. In that case, Alan Hartslief sought a

    declaration from the court that a binding settlement agreement had been reached between himself and his

    former employer, Terra Nova Royalty Corporation. In looking at the totality of the evidence, the court

    determined that a binding agreement had been reached, despite the fact that a formal agreement had not

    been signed.8 The court relied on the following statement from Bawitko Investments Ltd. v Kernels

    Popcorn Ltd9. in making its decision:

    When the parties agree on all of the essential provisions to be incorporated in a formal document with the intention that their agreement shall thereupon become binding, they will have fulfilled all the requisites for the formation of a contract. The fact that a formal written document to the same effect is to be thereafter prepared and signed does not alter the binding validity of the original contract.10

    The court explained, however, that when the understanding or intention of the parties is that their legal

    obligations are to be deferred until a formal contract has been approved and executed, the original or

    preliminary agreement cannot constitute an enforceable contract.11

    Drafting Tips

    Parties can avoid having a court determine that an LOI they thought was non-binding is actually

    binding by being aware of simple drafting tips. When drafting an LOI, it is advised that parties to a

    potential transaction expressly state their intention that the LOI be binding or non-binding. In doing so,

    the parties will ensure that both sides to the transaction have the same expectations regarding the

    5 Ibid at para 33. 6 Ibid at para 34. 7 Hartslief v. Terra Nova Royalty Corporation, 2013 BCCA 417 (CanLII). 8 Ibid at para 17. 9 Bawitko Investments Ltd. v. Kernels Popcorn Ltd., 1991 CanLII 2734 (ON CA). 10 Supra note 1 at para 9. 11 Ibid at para 9.

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    consequences of the LOI. Additionally, when drafting an LOI that is intended to be non-binding, parties

    should avoid the use of language such as it is agreed or this agreement. As the Wallace v. Allen case

    demonstrated, such language indicates an intention to be bound12. Instead, when drafting an LOI, parties

    should use language such as it is intended or the parties intend. The use of terms of intention

    indicates that the LOI is not meant to be binding. Parties should also ensure that they manage post-LOI

    conduct. Communications with employees, public announcements, letters to clients and all similar

    communications and correspondence should all be carefully managed to ensure that they do not indicate

    that a deal has been made.

    In order to keep the transaction moving forward, an LOI should include a timeline setting out

    important dates, including the specific date for the signing of the definitive agreement. It can also be

    helpful for parties to include what missing information will be determined before the signing of the

    definitive agreement.

    The Bhasin Decision and the Duty of Good Faith

    Overlaying the discussion above is the 2014 Supreme Court of Canada landmark decision in

    Bhasin v. Hrynew13. In Bhasin, the Supreme Court of Canada established good faith contractual

    performance as a general organizing principle of the common law of contract14. The court also created a

    specific duty of honesty in contractual performance15. The court explained the duty of honesty in

    contractual performance as follows:

    This means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about ones contractual performance.16

    12 Supra note 3. 13 Bhasin v. Hrynew, 2014 SCC 71 (CanLII) [Bhasin]. 14 Ibid at para 33. 15 Ibid at para 73. 16 Ibid.

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    Bhasin was silent on whether the duty of good faith applies when parties are negotiating an agreement or

    whether the duty would apply to pre-contractual negotiations such as a non-binding LOI. However,

    moving forward, the Bhasin decision may indicate a trend to expand the duty of good faith to include pre-

    contractual negotiations. If such a decision was to occur, one can expect a significant shift in how LOIs

    are drafted. Establishing a duty of good faith in pre-contractual negotiations would open the door to new

    types of liability claims. For instance, when drafting a non-binding LOI, it will be possible to bring a

    claim if one party lies or intentionally misleads the other party about a matter in the LOI. Accordingly, if

    the Bhasin decision was to expand to pre-contractual negotiations, it could result in parties to a

    transaction being legally obligated to be more respectful and co-operative in their negotiations. While the

    Bhasin decision has yet to result in a duty of good faith in pre-contractual negotiations, this may change

    moving forward as courts continue to review how the Bhasin decision impacts contractual performance.

    Conclusion

    Parties to an LOI are advised that while an LOI may seem like a simple document, if drafted

    improperly, it could lead to serious legal ramifications. Parties to a proposed transaction must be aware

    that if there is any discrepancy regarding whether an LOI is binding or non-binding, it could result in a

    court inferring that an LOI that a party thought was non-binding, is actually binding. Parties can avoid

    this situation by keeping in mind simple drafting tips such as stating whether the LOI is intended to be

    binding or non-binding, being aware of the language used in the LOI, and managing post LOI conduct.

    Moving forward, parties to a proposed transaction should also be aware of the potential impact of the

    Bhasin decision. While the Bhasin decision has yet to impact LOIs, it is possible that courts will expand

    the duty of good faith to pre-contractual negotiations, such as the drafting of an LOI.

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  • TAB 2

    Tips about Tricky Purchase Price Adjustments and How To Deal with Them

    Xue Yan Borden Ladner Gervais LLP

    September 19, 2017

    Commercial Real Estate TRANSACTIONS 2017

  • Tips about Tricky Purchase Price Adjustments and How to Deal with Them

    Xue Yan Borden Ladner Gervais LLP

    What is a Purchase Price Adjustment?

    What we typically see on a Statement of Adjustment

    Purchase price reduction or bonus payment

    Causes of a Purchase Price Adjustment

    Changes in facts or understanding

    Timing of acquisition

    Changes in Facts or Understanding

    Tricky to lawyers: often a business term

    Tip: What is the client buying or selling?

    Examples:

    Purchasing/selling for development purposes

    Acreage - developable acreage may not be as objective

    Density

    Purchasing income producing properties

    Support for / guarantee of lease revenue in respect of vacant leased premises

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  • Timing of Acquisition

    Tricky to lawyers: not simply prorated

    Tip: business operational perspective

    Examples:

    Rents and receivables from the tenants Timing: leasing year v. closing

    Realty tax refunds Tenants right to recover

    Leasing costs Imbalance of obligations and benefits Whether the party has played a part in negotiating such costs

    Accounts receivables Rents received from a tenant that were in arrears prior to closing

    Mortgage assumption Mark to market

    2 - 2

  • TAB 3

    Agreement of Purchase and Sale Due Diligence Provisions Checklist

    Lanette Wilkinson Stikeman Elliott LLP

    September 19, 2017

    Commercial Real Estate TRANSACTIONS 2017

  • THE LAW SOCIETY OF UPPER CANADA, CONTINUING PROFESSIONAL DEVELOPMENT COMMERCIAL REAL ESTATE TRANSACTIONS 2017

    AGREEMENT OF PURCHASE AND SALE DUE DILIGENCE PROVISIONS

    CHECKLIST

    Lanette Wilkinson, Stikeman Elliott LLP

    Deliveries Provisions Checklist

    Complete list of due diligence deliveries is included in APSo Sample deliveries: existing surveys, as built plans, drawings or specifications,

    property tax assessments and tax bills, rent rolls, income and expensestatements for the property, financial statements, structural reports, buildingcondition reports, engineering or environmental reports, copies of contracts,leases and warranties, lists of chattels, insurance policies, etc.

    All listed deliveries are in Vendors possession and control Vendor can provide listed deliveries without breaching contractual or legal

    obligations to third parties or any applicable law The location of the due diligence deliveries is defined (example: data site, property

    management office, Vendors head office, other) The timing of delivery is defined Deliveries are specified as being subject to the confidentiality provisions of the APS

    Additional clauses

    Vendor is not obligated to disclose any information that would jeopardize privilegeor breach contractual or legal obligations to third parties

    Purchaser can request additional disclosure prior to due diligence date Vendor can make subsequent disclosure prior to the due diligence date, without

    consequence Obligation of Vendor to obtain reliance letters

    Access Provisions Checklist

    Purchaser is provided with access to the property to conduct due diligence during itsdue diligence period/prior to closing, at Purchasers sole cost and expense

    Access will be made during normal business hours and with prior notice to Vendorunder the supervision of a representative of Vendor

    Purchaser will not conduct intrusive or invasive testing, without approval of Vendor Vendor will authorize Purchaser to correspond with governmental authorities for

    off-title due diligence, but Purchaser will not request or cause any on-siteinspections to be conducted on the property

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    Purchaser to keep the property free of liens arising from its inspections or tests Purchaser will notify Vendor of any damage caused by its access, will repair and

    restore any damage caused by it to the property, and will indemnify Vendor for thecost of repairing any such damage

    Obligation to indemnify Vendor for damage caused during access and Purchasersobligations to repair and restore the property to survive termination of the APS

    Additional clauses

    Purchasers access is subject to the rights of tenants of the property Purchaser will not speak to tenants or employees (other than as expressly permitted

    by Vendor) Purchaser will minimize interference or disruption to the normal operations on the

    property (by the Tenant or otherwise) Purchaser required to comply with safety policies and procedures of any tenants or

    any business being operated on the property Purchaser will maintain insurance, naming Vendor as additional insured, and will

    provide a certificate of insurance to Vendor prior to accessing the property Purchaser will provide the names and titles of individuals who will be accessing the

    property, details on the duration of the visit and a description of the purpose of theaccess/activities to be conducted

    Treatment of newly commissioned reports Vendors request to receive/not toreceive copies

    Purchaser will not be liable for uncovering any adverse facts or circumstancesaffecting the property or pre-existing conditions

    Confidentiality Provisions Checklist

    Purchaser (and, if applicable, its representatives, agents, consultants and advisors)to keep all property information, documents and materials related to the property instrict confidence until closing (or if closing does not occur, from and aftertermination of the APS)

    Purchaser to notify Vendor if any disclosure is required by law or judicial process If the transaction is not completed, Purchaser to return all property information,

    documents and materials to Vendor, including any copies, and will destroy allmaterials prepared on the basis of that property information

    Confidentiality provisions are stated to survive the termination of the APS

    Additional Clauses

    Purchaser is permitted to disclose confidential information to lenders or investors,shareholders, or professional advisors, to the extent such parties agree to keep theinformation confidential on the same terms as set out in the APS

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    Purchaser can retain any materials, data or electronic records required by applicable laws or by corporate data retention policies

    Purchaser to deliver an officers certificate following termination of the APS confirming destruction or return of property information as required by APS

    Restriction on issuing press release or other public announcement without mutual approval of Vendor or Purchaser (exception for disclosure required to comply with laws or rules of any stock exchange)

    3 - 3

  • TAB 4

    Interim Operation Before Closing: Things That Can Go Wrong

    Rod Davidge Osler, Hoskin & Harcourt LLP

    September 19, 2017

    Commercial Real Estate TRANSACTIONS 2017

  • LEGAL_1:45778777.1

    INTERIM OPERATION BEFORE CLOSING: THINGS THAT CAN GO WRONG

    Rod Davidge, Eric Choi and Sarah Sharp

    Osler, Hoskin & Harcourt LLP

    1. INTRODUCTION

    Any number of things can go wrong between signing the agreement of purchase and sale and closing: the largest tenant in a shopping mall can go bankrupt; acres of farmland can be contaminated with hazardous waste; a profitable factory can burn to the ground.

    At common law, the purchaser bears the risk of loss in the interim period between executing the agreement of purchase and sale and the date of closing and, unless expressly contracted for, the purchaser has no right to claim the proceeds of the vendors insurance. This may be viewed as being unfair to the purchaser since the vendor enjoys the benefits of the owning the property, including receiving the income from the property, while the purchaser obtains none of the benefits but carries much of the risk. In light of this, a standard agreement of purchase and sale will typically hold the vendor responsible for certain problems which arise during the interim period, thereby reversing the allocation of risk between the parties. Of course, the extent of the vendors responsibility for unexpected events will depend on the relative bargaining power of the parties.

    Two provisions in an agreement of purchase and sale which protect the purchasers interests are the vendors representations and warranties and the damage and destruction clause. Purchasers can claim damages or, in some cases, terminate the agreement on the basis that the vendors representations and warranties are not true as of the date of closing. Representations and warranties can anticipate and provide a remedy for many problems arising in the interim period, including tenant default, tenant disputes, environmental contamination, pending litigation and employee claims. Damage and destruction clauses similarly provide purchasers with a remedy for damage that occurs to the property in the interim period. Such clauses may provide purchasers with the right to the vendors insurance proceeds or the right to terminate the agreement.

    The significant risks to the purchaser at common law can and often are ameliorated by express provisions of the agreement of purchase and sale. Accordingly, it is crucial for parties to understand their position at law regarding loss during the interim period before such loss occurs and set out the applicable remedies in the purchase agreement.

    Rod Davidge is a partner and National Real Estate Practice Group Chair, Eric Choi is an associate in the Real Estate Practice Group, and Sarah Sharp is a student-at-law with Osler, Hoskin & Harcourt LLP.

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    LEGAL_1:45778777.1

    2. COMMON LAW

    Purchaser at Risk

    At common law, the legal risk shifts from the vendor to the purchaser after the parties have executed the agreement of purchase and sale. This transfer of risk arises because an agreement of purchase and sale is simply a contract to buy an estate in a piece of real property1: the characteristics of the property (such as whether it has buildings or the condition of those buildings) can be separated from the sale of the estate. A purchaser may, in fact, enter into an agreement of purchase and sale because the land contains a store in good condition that is leased to an excellent tenant. However, at common law, the purchaser has contracted only to acquire legal title to the land itself, and will not suffer any loss if either the tenant or the store does not exist as of the date of closing.

    The doctrine of equitable conversion sets out that a purchaser obtains an equitable interest in land upon the execution of a valid agreement of purchase and sale for that land.2 As owner of the property in equity, the purchaser is responsible for any problems that arise after the agreement of purchase and sale is executed. The classic formulation of this principle is found in Lysaght v. Edwards3:

    [I]t appears to me that the effect of a contract for sale has been settled for more than two centuries It is that the moment you have a valid contract for sale the vendor becomes in equity a trustee4 for the purchaser of the estate sold, and the beneficial ownership passes to the purchaser.

    As trustee, the vendor must use reasonable care in preserving the property.5 However, if the property damage or loss occurs through no fault of the vendor and the contract provides no protection to the purchaser by specifying that the property remains at the risk of vendor, the purchaser will be responsible for any loss during the interim period.6

    1 Brian D Bucknall, Insurance, Patent Defects and Changes of Condition in Bruce Salvatore, Craig R Carter & Paul

    M Perell, eds, Agreement of Purchase and Sale (Toronto: Butterworths, 1996) 251 at 255.

    2 The purchaser gains an equitable interest only where the remedy of specific performance is available. If specific performance is inapplicable because of a defect in title, misrepresentation, or other reason, then the purchaser does not gain an equitable interest in the property. See Cornwall v Henson (1899) 2 Ch 710 at 714.

    3 (1876), 2 Ch D 499 at 506 [Lysaght]; affd Simcoe Vacant Land Condominium Corporation No 272 v Blue Shores Developments Ltd, 2015 ONCA 378.

    4 The relationship is not a typical trusteeship and the vendor is not a bare trustee: the vendor has a personal and substantial interest in the property, a right to protect, and an active right to assert that interest if anything is done in derogation of it. While case law has not been consistent in describing the trustee relationship between vendor and purchaser, there is agreement that, at common law, the purchaser bears the risk of loss to the property that occurs through no fault of the vendor. See Buchanan v Oliver Plumbing & Heating Ltd (1959) OR 238 (Ont CA).

    5 Lysaght, supra note 3 at 507.

    6 D H Lamont, Real Estate Conveyancing (Toronto: Law Society of Upper Canada, Department of Continuing Education, 1976) at 68-69 as quoted in George Alexandrowicz, Real Estate Transactions, Cases, Text and Materials (Toronto: Emond Montgomery Publications Limited, 2003) at 252.

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    LEGAL_1:45778777.1

    Vendor and Purchaser Insurance

    One method of protecting a purchaser from certain losses to the property that occur in the interim period is through insurance. However, at common law, there is no requirement on the vendor to maintain an insurance policy.7 Even if the vendor does have an insurance policy, the purchaser may not be entitled to receive the proceeds of that policy despite bearing the cost of the damage or loss.8 Moreover, insurance would not cover losses arising from circumstances other than damage and destruction, such as a tenants bankruptcy. In Wile v. Cook,9 the Supreme Court of Canada commented on the plight of a purchaser relying on the common law:

    The common law is harsh on a purchaser of real property that is damaged by fire or otherwise between the date of the agreement of sale and the date of closing. Unless otherwise provided by the agreement, the purchaser must go through with the purchase and pay the full purchase price. And he is not at common law entitled to the proceeds of any insurance on the property in the absence of express or implied arrangements for the purpose.

    A purchaser could obtain its own insurance over the property for the interim period. However, it is uncommon for purchasers to obtain this insurance, and doing so may be difficult or impossible.10 Holding such insurance may also lead to some practical problems in the event of damage, as both the vendor and the purchaser may have claims with separate insurers that need to be resolved comprehensively to determine the net loss and who should be responsible for that loss.11

    3. AGREEMENTS OF PURCHASE AND SALE

    Careful drafting of the agreement of purchase and sale can ease the impact of caveat emptor and equitable conversion on purchasers.12 At common law, caveat emptor, or buyer beware, is the principle that purchasers should be diligent and cautious in determining the amount and nature of their legal interests and take the property as is. In the context of problems arising in the interim

    7 Paine v Meller (1801), 31 ER 1088. The closing date for the sale of houses had been postponed, and the vendors insurance ended as of the intended closing date. After the intended closing date but prior to the actual closing, the houses were destroyed by a fire. The court held that the vendor was not required to maintain insurance coverage or to inform the purchaser that the insurance policy had been terminated. The purchaser was required to fulfill the contract and was responsible for the loss.

    8 Rayner v Preston (1881), 18 Ch D 1 (CA). The purchaser was unable to claim the proceeds of the vendors insurance policy following a fire because neither the agreement of purchase and sale nor the insurance contract specified that the vendors insurance could be extended to the purchaser. Subsequently, the insurance company recovered the insurance money from the vendor, as only the purchaser (and not the vendor) had suffered a loss.

    9 [1986] 2 SCR 137 at para 11.

    10 Bucknall, supra note 1, at 264.

    11 Ibid and Craig Brown, Protecting the Purchasers Interest, The Canadian Bar Review Volume LXII (The Canadian Bar Association: 1984) at 513-514.

    12 See Beatty v Wei, 2017 ONSC 3478. The doctrine of equitable conversion is subject to contractual terms negotiated between the vendor and purchaser, the vendors duty to disclose latent defects, and material misrepresentation.

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    LEGAL_1:45778777.1

    period, both caveat emptor and equitable conversion are counter-intuitive: the purchaser is liable for loss or damage occurring at a time when the purchaser had no control over the property, and the purchaser could not have uncovered the issue with sufficient diligence prior to signing the agreement of purchase and sale because the event or problem had not yet arisen. Accordingly, virtually all agreements of purchase and sale in Ontario reverse the common law position and specify that the risk of loss is borne by the vendor until the date of closing.13 This paper will focus on two provisions which can be used to protect purchasers: the vendors representations and warranties and damage and destruction clauses.

    I. Vendor Representations and Warranties

    Representations are factual statements made in order to induce the buyer to purchase the property, while warranties are promises that statements of fact are true14; in practice, there is little distinction between a representation and a warranty. Breach of either a representation or warranty set out in the agreement of purchase and sale will generally result in a remedy of damages rather than a right to terminate the agreement. However, many purchase agreements will explicitly provide that the innocent party will have a right to terminate in the event of a breach while preserving any other remedies it may have available (such as an action in damages or right to indemnity).

    There are two main purposes served by representations and warranties in a purchase agreement. The first is to provide information to the purchaser about the vendor and the property, thereby reducing the extent of due diligence required to be performed. The second is to allocate the liabilities and risk as between the parties. In order to minimize liability, vendors will want to limit the number and extent of representations and warranties provided, particularly with respect to those items that the purchaser can verify through its own due diligence investigations. The purchaser, on the other hand, will seek the most extensive representations and warranties.

    Often, an agreement of purchase and sale will provide not only that the representations and warranties contained the agreement are true as of the date of execution, but also that they will be true as of the date of closing. This opens the possibility that a vendor will be in breach under the purchase agreement, in many cases due to no fault of its own, as a result of an unforeseen event which causes a representation or warranty that was true as of the execution date to no longer be true as of closing. In addition, vendors will often have an obligation to disclose to the purchaser any information that may affect the validity of a representation or warranty. As the interim period can be quite lengthy in real estate transactions, vendors often take a significant risk where representations and warranties are to be true as of the closing date.

    Generally, there are three distinct types of representations and warranties covering the areas of: the status and authority of the vendor; the status of the real property; and the operation and

    13 Ramsey T Ali, Equitable Conversion and Damage Prior to Closing (Paper delivered at the Six Minute Real Estate Lawyer, 14 November 2007).

    14 Edward A Peterson, The Effective Use of Representations and Warranties in Commercial Real Estate Contracts (2009) at page 2: .

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    LEGAL_1:45778777.1

    maintenance of the real property.15 The latter two types of representations and warranties are most relevant in protecting purchasers from problems that arise during the interim period.

    Select examples of representations and warranties that can protect purchasers from problems arising during the interim period include:

    Representations and Warranties regarding the Status of the Real Property

    Assurances that there is no active, pending or threatened litigation that affects or isrelated to the property;

    Assurances that no portion of the property is the subject of a pending condemnation;

    Assurances that there are no violations of any environmental laws and no release,discharge, emission or disposal of any hazardous materials;

    Representations and Warranties regarding the Operation and Maintenance of the Real Property

    Assurances that there are no pending or threatened unfair labor practice charges orcomplaints relating to the property, nor any strikes or other measures that mayinterfere with the regular operation of the property;

    Assurances that the rent roll is accurate and complete, and that there have been nodefaults under any of the leases either by the vendor or the respective tenants;

    Assurances that the vendor has received no notice that any tenant intends tosublease, vacate all or part of the premises, or assign its lease;

    Assurances that there are no disputes by any tenants regarding the leases, thepremises, the payment of rent or the payment of maintenance fees, operatingcosts, tax, or other payments; and

    Regarding the status of operating agreements and other contracts.

    The nature and scope of the representations and warranties will differ depending on the type of property being purchased, whether an operating business is being purchased alongside the property, and the interests and bargaining position of the parties.

    It is easy to see where things can go wrong in the interim period. The property may become subject to litigation, a neighbouring property may have had a spill which affects the property, or a major tenant may have stopped paying rent. To reduce the risk borne by the vendor, it may wish to use qualifiers such as setting a materiality threshold or dollar threshold which the purchaser must meet to make a claim for breach, or setting a cap on the amount of damages it will be liable for. A vendor may also consider negotiating carve-outs for certain representations and warranties (especially those relating to items that are not in the vendors control) whereby the vendor will not be liable for unforeseen events that may occur prior to closing. However, in the course of negotiations,

    15 Ibid.

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    purchasers may argue that major events that have a material impact on the value of the property warrant a right to terminate the agreement.

    In situations where the agreement of purchase and sale does not set out the remedies available for a breach of a representation or warranty in the interim period, more often than not it would be preferable for both vendor and purchaser to negotiate a mutually satisfactory resolution, if possible (for example, by way of a credit in favour of the purchaser, holdback, indemnity or undertaking to complete an item post-closing), so that the parties will be able to close the transaction and avoid the uncertainty of litigation. However, counsel should assess the magnitude and significance of the breach to determine whether the situation can be sufficiently remedied to clients satisfaction.

    II. Damage and Destruction Clauses

    In general, agreements of purchase and sale, including the OREA standard form agreement, shift the risk for damage and destruction occurring in the interim period to the vendor. These damage and destruction clauses are drafted with the intent that the vendors insurance will protect both the vendor and the purchaser. A typical clause provides that the property and its buildings and chattels remain at the risk of the vendor until closing, and that the purchaser has some rights over the vendors insurance in respect of the property and/or has a right to terminate the agreement, although the right to terminate is often drafted such that it can only be triggered when there is substantial damage. Where there are multiple properties being sold under a single purchase agreement, the purchaser may have the option to drop a damaged property from the transaction.

    There are two potential issues that lawyers should be aware of with respect to the wording of standard damage and destruction clauses: the threshold of substantial damages and the availability of insurance proceeds.

    The first issue is that there is little guidance on the meaning of substantial damage. Where a purchasers termination right depends upon meeting the threshold of substantial damage, there is uncertainty as to how such damage would be measured (e.g., in relation to an area percentage of the buildings or in relation to the value of the property as a whole), and whether the court would apply an objective or a subjective test. This lack of clarity could increase the likelihood of litigation, and the purchaser would be required to close if the court ruled that the damage is not substantial. In commercial agreements, this issue is often resolved by assigning a threshold dollar amount as a trigger for the purchasers right to terminate.

    The second issue is that many damage and destruction clauses, including OREAs standard clause, do not require that the vendor carry insurance. In such a case, the purchasers only option is to terminate the agreement, as there are no insurance proceeds to cover the damage. For substantial damage, the purchaser has the right to terminate, but does not get what the it originally bargained for the property in its original condition. In the case of damage that is not substantial, the purchaser does not even have a right to walk away. The same problem arises if the vendor is unable to collect on insurance or if the proceeds of insurance are accounted for by prior claims, such as

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    LEGAL_1:45778777.1

    that of a mortgagee. Finally, there may be difficulty accessing insurance proceeds if the purchaser does not discover the damage that occurred prior to closing until after the transaction has closed.16

    One way to protect the purchaser is to add an obligation to maintain insurance, specifying the nature of the insurance and the value of the insurance policy in the agreement of purchase and sale. The parties would have to consider whether to contract for insurance to the full replacement value or to market value, and would have to account for co-insurance provisions and deductibles.

    Another way to protect the purchaser is to draft the damage and destruction clause to permit termination even if the damage is not substantial: the purchaser may prefer to terminate if it is uncertain as to the availability or amount of insurance proceeds. However, the vendor would likely reject a provision that permits the purchaser to terminate in the case of minor damage to the property, and it would be unfair to allow the purchaser to use the occurrence of such damage to terminate a transaction. A similar issue arose in Champlain Thickson Inc. v. 365 Bay New Holdings Ltd.,17 in which the purchasers refused to close on a purchase worth $24.5 million on the basis that the vendors failed to satisfy a condition precedent to fix the elevators, a job contracted to cost $6,200. The court was satisfied that the purchasers could refuse to close the deal and ordered the return of the deposit.

    Finally, the purchaser could be provided with the option to choose an abatement of purchase price in the amount equivalent to the damage, with all insurance proceeds being paid to the vendor.18 While permitting the purchaser to bypass issues of insurance altogether, the vendor may be unable to satisfy its payment obligations (for example, mortgage pay outs due on closing) without the full proceeds of sale and may be unwilling to risk that the insurance proceeds will not be available to cover substantial damage. In these circumstances, the vendor may take the position that the purchaser is adequately protected through the right either to terminate the contract or to proceed while relying on the insurance placed by the vendor. As vendors and purchasers have different concerns depending on the severity of the damage, it may be beneficial to have different remedies available for minor and substantial damage.

    16 Bradley McLellan, Property Damage and the Agreement of Purchase and Sale (Paper delivered at Disasters in

    Real Estate Practice: Tools and Strategies for Effectively Managing the Unexpected, 4-7 February 2015).

    17 [2007] OJ No 3254; 160 ACWS (3d).

    18 See the alternative damage clause suggested in Bucknall, supra note 1 at 263.

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  • TAB 5

    Unable or Unwilling (The Unofficial Guide to Answering

    Requisitions)

    Simon Crawford Bennett Jones LLP

    September 19, 2017

    Commercial Real Estate TRANSACTIONS 2017

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    UNABLE OR UNWILLING

    Simon P. Crawford Partner Bennett Jones LLP

    Much has been written about valid requisitions, and what constitutes a valid requisition, and

    much has been written about a vendor's right to deny requisitions made, where those requisitions

    are invalid.

    What is not often written about, is the vendor's right to not remedy a valid requisition that has

    been made by a buyer.

    Advantage, Buyer

    When one steps back from a real estate purchase contact for a moment, and considers the notion

    of requisitions in the first place, one might question why a vendor should have any right to refuse

    to remedy a requisition validly made. Isn't it the point of the contract, in the first instance, to

    ensure that the buyer gets good title? And on a balance, does it not make sense that a vendor who

    bargains to deliver good title, should not thereafter have the right to refuse to make that title

    good, should a defect be discovered, or at the very least, an obligation to convey what that

    vendor does own (subject to that defect) with an abatement?

    If you answer is yes, then you are entirely correct at law, assuming of course that you are

    practicing law before the 1800s. It was about that time that agreements of purchase and sale and

    offers to buy land were changing to specifically address the problem that vendors could be

    compelled to complete the sale of real estate with a valid title deficiency (that the vendor could

    not or did not want to remedy) through the remedy of specific performance, with an abatement.

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    The Contractual Right of Rescission

    The change that was being made to agreements of purchase and sale is what we now commonly

    refer to as the rescission or annulment clause. Over the last two hundred years, it has been

    variously worded and modified, but has always amounted to something like the following: if a

    valid requisition is made by the buyer within a certain period, and the seller is unable or

    unwilling to remedy or remove the subject matter of that valid requisition, then the seller may

    terminate the agreement and shall return the deposit.

    And so by contract, the balance of power (in respect of handling valid requisitions) appeared to

    shift in favour of sellers. On the plain reading of the rescission clause, the seller could exercise

    its discretion so as to determine that it was unwilling or unable to address the requisition and to

    unilaterally get out of its bargain. Even the plain wording of the modern OREA form appears to

    give a vendor a plain, unfettered and unilateral right to terminate the contract:

    "If within the specified times referred to.any valid objection to title or to any outstanding work order or deficiency notice, or to the fact that the said present use may not lawfully be continued, or that the principal building may not be insured against risk of fire is made in writing to the Seller and which the Seller is unable or unwilling to remove remedy or satisfy, or to obtain insurance save and except against risk of fire (title insurance) in favour of the Buyer and any mortgagee, (with all related costs at the expense of the Seller), and which the Buyer will not waive, this Agreement, notwithstanding any intermediate acts or negotiations in respect of such objections, shall be at an end and all monies paid shall be returned without interest or deduction" (emphasis added)

    Advantage, Vendor

    And for some time, courts were prepared to accept that the parties had contractually shifted the

    balance of power in the context of valid requisitions, from buyer to seller.

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    In 1884, the High Court of Justice in Dames v. Wood, In re1 considered the following similar

    language in the contract:

    "If the purchaser shall take any objection, or make any requisition as to the title, evidence or commencement of title, conveyance or otherwise, which the vendor is unable or unwilling to remove or comply with, the vendor may, by notice in writing delivered to the purchaser or his solicitor, and notwithstanding any intermediate negotiation, rescind the contract for sale, and the vendor is, within one week after such notice, to repay the purchaser his deposit money".

    On the facts, the purchaser made its requisitions in a timely manner, and the vendor had

    answered the requisitions. The decision does not set out the specific nature of the requisitions or

    the answers made. However, what is clear is that the purchaser did not accept the vendors

    answers. The vendor then sent notice stating that it was unable or unwilling to comply with the

    purchaser's objections and requisitions, and was exercising its contractual power to rescind the

    contract. In the face of this rescission, the purchaser withdrew its objections and requisitions and

    stated that it was willing to complete the purchase.

    The purchaser's counsel argued that ""inability" or "unwillingness" on the part of the vendor

    must be reasonable and the vendor ought to give notice to the purchasers as to which of the

    requisitions he was unable or unwilling to comply with".

    The court did not quite agree. In fact, the court weighed in heavily in favour of the plain meaning

    of the contract and the right of the seller to make a unilateral and unfettered decision to terminate

    the contract:

    "The question turns upon the meaning of the words "unable or unwilling." What do these words mean? The vendor knew that unreasonable and improper requisitions might be tendered to him, and accordingly he sought to protect himself on two grounds,

    1 Dames v. Wood, In re (29 Ch D 626; 54 L.J. Ch 771; 53 L.T. 177; 33 W.R. 685

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    unwillingness and inability to comply with them. He says in the first place, "I may be unable to answer these requisitions except at great trouble and expense, and I wish to protect myself accordingly." Or he may say, "The requisitions may not be of such a nature that I cannot comply with them, yet may they be so unreasonable and unjust that I may be unwilling to comply with them, by reason of the expense or otherwise, and in this case, also, I wish to protect myself" The conditions appear to me to contain a clear stipulation, namely, that the vendor may at any time say, in answer to requisitions, "I am unwilling to go on; I decline to answer them." No one has a right to inquire why he is unwilling; at any rate he is not bound to give his reasons".

    The court enforced the plain meaning of the contract - that seller may terminate the contract if it

    is unwilling or unable to answer or address requisitions, and need not give reasons why. Full

    stop. Thanks for coming out.

    And so begins the reason for this paper. To consider how, in the face of what was once treated as

    an absolute seller right of rescission, the courts have since brought equitable principles to bear so

    as to rebalance the rights between sellers and buyers dealing with valid requisitions.

    Good Faith Equity Intervenes

    In 1907 an Ontario court in Crabbe v. Little2 considered the purchase and sale of two properties

    on Spadina. The agreement provided that "if any objection or requisition is made by me which

    you are unable or unwilling to comply with, you shall be at liberty by notice in writing to rescind

    this agreement without interest". The purchaser presented "very lengthy requisitions" and the

    seller responded that he was "unwilling to go to the expense of complying with the requisitions",

    and he rescinded the contract.

    2 Crabbe v. Little 1907 CarswellOnt 604, 14 O.L.R. 631, 9 O.W.R. 551

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    The court (unlike the court in Dames v. Wood) took a different view in considering whether the

    rescission was validly exercised. The court stated:

    "The vendor, I find, acted in good faith; he had no improper motive in attempting to rescind the contract; he was advised by his solicitor that the expense of complying with the requisitions would amount to many hundreds of dollars, and that, even then, there were matters he could not obtain evidence upon, and so he was both unable and unwilling to comply with the requisitions".

    And so what was recognized in this decision is that there were criteria for when the right of

    recession could be relied upon by a vendor; or perhaps more correctly, it was recognized that

    there may be certain equitable reasons why a seller would not be permitted to avail itself of this

    contractual right of rescission.

    The case did not turn on the point at the time, but the court referred to two indicia that might

    have disqualified the seller from such reliance:

    (a) had he not acted in good faith; and

    (b) had he had an improper motive in attempting to rescind the contract.

    While these were imperfect tests, they constituted judicial recognition that equity played an

    important role in understanding the rescission rights of the seller.

    Sweet Will

    Some fourteen years after Crabbe v. Little, the Ontario Court of Appeal wrote (what is now) one

    of the more quoted decisions on the subject, in Hurley v. Roy3.

    In this case, the seller contracted to sell a property but he and his wife each owned half the

    property. His wife took the position that she would join in the required conveyances but only if

    she received half the money. When the buyer requisitioned that it receive a conveyance from

    3 Hurley v. Roy 1921, CarswellOnt 243, 50 O.L.R. 281, 64 D.L.R. 375

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    both spouses, the seller refused (on the grounds that he would have to relinquish half the

    purchase price to his wife to do so), and purported to rescind the contract.

    The court considered his claim that he was unable or unwilling and stated:

    "The provision enabling the vendor to rescind has no application to the facts. The vendor can convey if he allows his wife to have her share of the price. This provision was not intended to make the contact one which the vendor can repudiate at his sweet will. The policy of the Court ought to be in favour of the enforcement of honest bargains, and it should be remembered that, when a contract deliberately made is not enforced because of some hardship the agreement may impose on one contracting party, the effect is to transfer the misfortune to the shoulders of the other party, though he is admittedly entirely innocent".

    So without stating it expressly, the Court in Hurley v. Roy was further limiting the availability of

    the rescission right, by in effect reversing the onus stating that the exercise of the rescission

    right, where such exercise would amount to terminating an honest bargain because of undue

    hardship on the seller, was invalid.

    For a time, there In Louch v. Pape Avenue Land Co4 the court accepted the trial court's finding

    that the objections made had been valid, and that "there is no suggestion of bad faith". The court

    then found that, in the absence of bad faith, the Vendor could avail itself of the rescission clause

    even it if had bargained to sell something that it can't prove ownership:

    "Take, for instance, the case where a piece of land is included in the description to which a title cannot be made out: regard must be had to the importance of that particular piece, and the amount of compensation which would have to be paid. I think it quite reasonable for the vendor to say "I will reserve to myself a mode of escape from all the trouble of these enquiries and investigations and expenses of arbitration. I desire to settle the price myself; and if the purchaser insists on his objections to my title, I will retain in my own hands the power to rescind".

    4 Louch v. Pape Avenue Land Co 1928 CarswellOnt 47, [1928] 3 D.L.R. 620, [1928] S.C.R 518

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    Louch v. Pape moved the needle back in favour of the vendor, and focused on the rescission

    clause as a defence to the exercise by the purchaser of a right of specific performance with an

    abatement. In doing so, Louch tacitly took the position that the only way to be disqualified from

    exercising the rescission right, was to have acted in bad faith (even if it had agreed to sell

    something it could not prove good title to).

    The Reckless Cases

    All along, however, running along a parallel track to the good faith cases, were a collective of

    cases I affectionately call the "Reckless Cases". In Re Jackson and Haden's Contract5, Master of

    Rolls Collins stated:

    "It is to be noted that, in dealing with this right to rescind, the learned judges have always criticized most carefully the conduct of the parties to the contract, and the purpose for which the particular condition must be supposed to have been introduced, with a view to seeing whether or not it is, in the circumstances of the particular case, a condition that ought to be applied for the benefit of the person who had introduced it. In this particular case, there is no doubt that this clause was introduced for the benefit of the vendors. The Court considers whether or not the vendor has so acted in the matter as to avail himself of that condition: or it may be put in other words. Can we construe this condition [sic], in the circumstances, as applying to the particular state of facts which has caused the difficulty."

    Then the court addressed the standard the elements of behaviour that might prevent a Vendor

    from relying on the rescission clause:

    "It may stop short of fraud, it may be consistent with honesty; but at the same time, there must be a falling short on his part he must have done less than an ordinary prudent man, having regard with his relations to another person, when dealing with him, is bound to do; and therefore where, knowing the exact facts, he has recklessly made a description of them which would mislead another person who did not know as much as himself (even though he thought that person might know as much as himself), there is a clear failure of duty on the part of the vendor which fairly disentitles him to say that

    5 Re Jackson and Haden's Contract, [1906] 1 Ch. 412

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    a clause introduced into the contact for his benefit is introduced to meet such a case as that which has arisen here, namely a reckless disregard by the vendor as to accuracy of statement when he is making a statement which a view to the other people acting on it as correct. On that ground it is enough to say that this particular condition must be read (as against the persons who are taken to have introduced it for their own benefit) as not applying to the particular case to which they seek to apply it, namely, something arising wholly and solely out their own recklessness in the manner in which they have formulated the contract."

    In Merrett v. Schuster6, the court distinguished In Re Jackson and Haden's Contract as standing

    for the principle that "recklessness" only applied to situations where the vendor had made an

    untrue statement without having substantial grounds for belief in its truth. Instead the court stated

    that the right of rescission should be allowed, even in the face of untrue statements having been

    made by the vendor, so long as the vendor acted in good faith and reasonable belief in those

    facts.

    In Lavine v. Independent Builders Ltd.7, the Court confirmed and applied the recklessness test

    from In Re Jackson and Haden's Contract in a situation where "on the evidence this was plainly

    not a mere oversight or mistake upon the part of the vendor" and that the vendor "stated that the

    vendor owned the lands to the read and could give the lane desired". As it turned out, he couldn't,

    and was found to have been reckless.

    Recklessness and Bad Faith

    And then it happened. In a 1958 decision, the Supreme Court of Canada acknowledged that both

    recklessness and bad faith had roles in limiting the vendors right of rescission.

    6 Merrett v. Schuster, [1920] 2 Ch. 210 7 Lavine v. Independent Builders Ltd. (1932) CarswellOnt 72, [1932] 4 D.L.R. 569 [1932] O.R. 669

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    In Freedman v. Mason8, the vendor agreed to deliver a deed containing a bar of dower and later

    attempted to terminate the contract on grounds that he was unable to obtain one. The court found

    that "his duty was, at the very least, to make a genuine effort to obtain what was necessary to

    carry out his contract and that there can be no doubt in this case that he made no such effort".

    The court found that both husband and wife wanted out of the transaction and that the inability to

    obtain the bar of dower was perhaps not genuine.

    Then the court gave us a first taste of how the concepts of recklessness and bad faith can co-exist

    in the analysis:

    "A vendor who seeks to take advantage of the clause must exercise his right reasonably and in good faith and not in a capricious or arbitrary manner. This measure of his duty is the minimum standard that may be expected of him, and there are cases where a cause which might otherwise be valid as justifying rescission will not be available to him if he has acted recklessly in entering into a contact to convey more than he is able."

    And there we have it. The recklessness test applies to the point in time when the contract is

    entered into. A vendor cannot avail himself of the right of rescission if it acted recklessly in

    bargaining for something it could not convey.

    The bad faith test is one that is applied at the time the vendor is otherwise allowed to respond to

    the valid requisition and exercise the right of rescission in the contract. It can only do so if it is

    acting in good faith and not in a capricious or arbitrary manner.

    Which then raises the question, how does one act capriciously or in bad faith? The court went on:

    "his attempted rescission was arbitrary and there was a complete and deliberate failure on his

    8 Freedman v. Mason [1958] CarswellOnt 73, [1958] S.C.R. 483, 14 D.L.R. (2d) 529

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    part to do what an ordinarily prudent man having regard to his contractual obligations would

    have done".

    Is this the entire test? Not quite. It is only an example. The court went on to state: "I doubt that it

    is possible to formulate in the abstract and apart from the actual conditions of a case the precise

    limits within which the clause may enable a vendor to rescind."

    In Paulter Holdings Ltd. v. Karrys Investment Ltd.9, the court determined that, in getting a court

    order to determine that an instrument on title did not constitute a registerable encumbrance on

    title, a vendor had satisfied its duty to evidence to the purchaser that its title was not affected

    thereby. An effort had been made.

    Just two years later, in 1963, the Privy Council in Selkirk v. Romar Investments Limited10

    illustrated how the British courts were on a parallel track. In a manner not unlike Freedman v.

    Mason, the court noted that there are two distinctly recognized ways in which a vendor can

    disqualify itself from being able to exercise its right of rescission, both of which are rooted in

    principles of equity. By way of preamble, the court recognized the longstanding notion that, but

    for such principles, the contractual right in favour of the vendor would stand on its terms:

    "If a vendor, having stipulated for or been conceded such a right, is to be precluded from asserting it in any particular context, it must be by virtue of some equitable principle which enures for the protection of the purchaser; and it is not in dispute that Courts of Equity have on numerous occasions intervened to restrain or control the exercise of such a right of rescission in contracts for the sale of land, despite what, on the face of the contract, its terms seem to secure for the vendor."

    9 Paulter Holdings Ltd. v. Karrys Investment Ltd. [1961] CarswellOnt 122 [1961] O.R. 579, 28 D.L R. (2d) 642 10 Selkirk v. Romar Investments Limited [1963] 1 W.L.R. 1415, [1963] 3 All ER 994 (94)

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    That said, the court then recognized the longstanding cases that established the principle of good

    faith:

    "Thus it has been said that a vendor, in seeking to rescind, must not act arbitrarily or capriciously or unreasonably. Much less can he act in bad faith. He may not use the power of rescission to get out of a sale "brevi manu", since by doing so he makes a nullity of the whole elaborate and protracted transaction."

    and as to the standard of behaviour, the court remarked:

    "a vendor has to be reasonable: he does not have to be beyond criticism before he can exercise his right of rescission".

    The court also turned its mind to the separate notion of recklessness:

    "Above all, perhaps, he must not be guilty of "recklessness" in entering into his contract, a term frequently resorted to in discussions of the legal principle and which their Lordships understand to connote an unacceptable indifference to the situation of a purchaser who is allowed to enter into a contract with the expectation of obtaining a title which the vendor has not reasonable anticipation of being able to deliver".

    It is on the point of "recklessness" that the court then focused, and despite that it is a decision of

    the Privy Council, the colour provided by the court is helpful in our understanding of the

    principle as it has been and will, I expect, be applied by Canadian courts. On the issue of

    recklessness, the court stated (and for convenience, I provide three excerpts that collectively

    illustrate the concept):

    "what is now at issue, which is simply the question whether the respondent is to be held guilty of "recklessness", in the legal sense, in not warning the appellant before the contract was signed that there were certain evidential gaps in the proof of its title that it was unlikely to be able to fill up"

    "While there have indeed been some instances in which a vendor has been deprived of the right of rescission for entering into his contract in circumstances in which he had no reasonable assurance that he could convey the whole title for which he was contracting,

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    his disqualification arises out of his carelessness or lack of prudence in the particular circumstances and not out of a mere failure to disclose a defect of title, much less a defect in the evidence of title, which rendered the title he had to offer less than complete"

    A Vendor's position for this purpose has to be ascertained as at the date when he enters into his contract.

    And so in many respects the concept of recklessness amounts to a failure of a duty to warn the

    purchaser in advance of entering into the agreement of purchase and sale that the vendor cannot

    (or may not) be able to evidence and deliver good title to the property, and such failure has to be

    because the vendor exercised carelessness or a lack of prudence in the particular circumstances

    (an "unacceptable indifference to the situation of a purchaser"). To put it another way, it is not

    that the vendor doesn't have good title, or has an evidentiary issue in proving good title, it is that

    it acted recklessly in inducing the purchaser to enter into the contract for good title, in the face of

    that known deficiency.

    The Modern Canadian Position on Good Faith is Established

    So far we have considered some of the pivotal developments in the case law, both British and

    Canadian, up to the 1960s. In this part of the discussion we will track what has happened in the

    Canadian courts in the last 40 years.

    The discussion begins with Mitz v. Wiseman11. The Ontario High Court of Justice addressed

    arguments related to the degree of effort that a vendor put into answering valid requisitions, and

    whether having regard to that effort, its subsequent rescission of the contract amounted to bad

    faith. While the case does not add to the test in any way (it being acknowledged that the facts of

    11 Mitz v. Wiseman [1971] CarswellOnt 192

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    each case determine its application), the decision is interesting because it points to certain things

    that a vendor need not resort to in evidencing its good faith exercise of its rescission right.

    Speaking of the vendor, the court stated:

    "I do not believe that it is necessary for him to engage on an extensive and expansive law suit, or to commence mandamus proceedings.this would place the vendor in an intolerable position for at any moment, after a reasonable time, the purchaser could withdraw from his obligations on the ground that the sale was not being completed within a reasonable time".

    It is also a helpful decision because the court expressly rejected that vendor has to evidence "best

    efforts" in resolving a valid requisition before exercising its right of rescission.

    The good faith concept was developed a little further in 1982 in Koccoris v. Cordery12. Like

    some of the earlier cases, this was one in which the vendor had contracted to sell real estate, but

    had to compel his wife to bar dower in order to satisfy the purchaser's valid requisition. In

    assessing whether the "good faith" test in Mason v. Freedman was met, the court remarked that

    the vendor had "made real, honest, genuine, bona fide and reasonable attempts to get his wife to

    bar her dower", and that therefore he was unable to satisfy the requisition.

    However, for further colour, the court also reaffirmed that the vendor has the right to be

    unwilling to satisfy the requisition, albeit a restricted right. Reaffirming Mason v. Freedman, the

    court stated:

    "While the right to be unwilling is a restricted one in the sense pointed out by Mason v. Freedman there remains the right on the part of the vendor to decline the exercise of his will in favour of removing the objection. The clause cannot be used to make a valid agreement terminable at the defender's will, but it does leave him with a choice. In my opinion if he acts reasonably in making that

    12 Koccoris v. Cordery [1982] CarswellOnt 683, [1982] O.J. No 2314, 20 A.C.W.S. (2d) 57, 28 R.P.R 75

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    choice then the clause is operative to render the transaction null and void."

    And then in a manner curiously similar to Mitz v. Wiseman, the court confirmed that "a Court

    must be very careful before it says that a person is not genuinely attempting to fulfill his

    contractual obligations when he declines to make an application to a Court which could lead

    directly or indirectly to protracted litigation or an abatement of the purchase price".

    In 1988, two decisions advanced our understanding of what the standard of performance is in

    order to assert that one is unable to satisfy a valid requisition:

    1. In Mink Printing Inc. v. K.J. Choi Ltd.13, the court suggested what a

    minimum standard might be in evidencing that one acted in good

    faith when asserting that it was unable to satisfy a requisition. The

    court stated that a vendor must "at the very least, make a genuine

    effort to obtain what was necessary to carry out his contract". This

    is the first time that the notion of a "genuine effort" was suggested

    to be the minimum standard in this regard.

    2. The discussion was advanced by a Master's decision in 777829

    Ontario Ltd. v.616070 Ontario Inc14, (appeal refused by Ontario

    High Court of Justice), which considered a situation in which the

    purchaser requisitioned the removal from title of a certificate of

    pending litigation. The vendor brought an application for its removal

    that same day, and extended the closing date, but when the

    certificate was still not vacated by that extended closing date,

    13 Mink Printing Inc. v. K.J. Choi Ltd. [1988] CarswellOnt 624, 2 R.P.R. (2d) 170, 55 D.L4th) 614, 66 O.R. (2d) 737 14 777829 Ontario Ltd. v.616070 Ontario Inc

    5 - 14

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    refused to extend the closing date further, stating that it had used its

    best efforts to vacate the certificate by the closing date and was

    terminating the contract. The order to vacate the certificate was

    made by a court four days later. Although the vendor had stated that

    it had been unable to obtain the order by the closing date, the court

    found that, on the facts (and presumably the fact that the order

    happened on the heels of the termination), the vendor had been

    unwilling (and not unable). The purchaser argued that the vendor

    had sought an order that was returnable after the date that the vendor

    extended the closing date to, which indicated a lack of good faith.

    The trial judge considered Freedman v. Mason, and came to the

    conclusion that "in the absence of some binding authority as to how

    the "annulment clause" is to be applied in the circumstances of the

    within case, I am obliged to accept the plain meaning of the words

    of clause 12 of the agreement of purchase and sale"and that those

    words "clearly allow an unwilling vendor, without qualification, to

    withdraw from the agreement in the circumstances of the within

    case. Going further, the court went on to state that it was prepared

    to rely on the ruling in McNiven v. Pigott for the proposition that a

    vendor need not litigate to make good title where there was no

    collusion or deliberate failure by the vendor to cloud title.

    What is interesting about this judgement is that, when one steps back

    from the facts, it appears that the vendor could have completed the

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    transaction had it simply agreed to extend the closing date by a short

    time, in order for the process to run its natural course, but that it had

    deliberately extended the closing date to an earlier date just shy of

    when it would have been able to complete the process. What the

    court was apparently unwilling to do, was to find that the vendor had

    an obligation to act reasonably or in good faith when it came to

    granting extensions of closing in order to satisfy a valid requisition.

    As for the standard of behavior to evidence "good faith", the court

    stated: "No authority has been cited to me in support of the

    proposition that the defendant in the within action is obliged to do

    whatever is necessary (even "reasonably" necessary) to remove the

    cause of a requisition on title, when that cause (in this case a

    certificate of pending litigation) was unknown to him at the time of

    entering into the contract".

    The fact that the court in 1988 at affirmed that a vendor does not have to do what is reasonably

    necessary to satisfy requisitions in order rely on the annulment clause, resonated five years later

    when, in Grant v. Tiercel Digital Ltd.15 the Ontario Court of Justice (General Division)

    considered a situation where the vacation of various construction liens from title was

    requisitioned. On the facts, the court found that the vendor had made "significant efforts" to

    settle the lien litigation and "at the very least were not standing idly by". And on the applicable

    standard of performance, the court stated that "it is apparent from the cases that it is the

    reasonableness of the vendor's efforts to satisfy the requisition that are important." The Ontario

    15 Grant v. Tiercel Digital Ltd. ([1993] CarswellOnt 602, 32 R.P.R. (2d) 51, 40 A.C.W.S. (3d) 369, 9 C.L.R. (2d) 1

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    Court of Appeal16, dismissed the appeal but relied more broadly on the principle that the trial

    judge had concluded that the vendor had not acted in bad faith.

    A light shone through the judicial fumbling as it relates to the recklessness test, when the Ontario

    Court of Justice, General Division, released its decision in 11 Suntract Holdings Ltd. v. Chassis

    Service & Hydraulics Ltd17.

    The court considered the judicial canon, both British and Canadian, on the rescission of real

    estate contracts, and provided us with the following pithy points, which can be considered to be

    good law in Canada today:

    1. the limitations on a vendors conduct are twofold, are independentof one another, and impose on a vendor separate and distinct dutieswhich arise at different times in the transaction; the first being at thetime that the Agreement of Purchase and Sale is entered into and thesecond being after an objection is made to the vendors title;

    2. If the vendor has no knowledge of the title defect, or the purchaserdoes have knowledge of the title defect, whether actual or imputed,a Court is more likely to find that the first limitation does not apply.It will go on to consider the second limitation in order to decidewhether the vendor did all that it could to make good the title beforepermits the vendor to repudiate the contract; and

    3. the Court confirmed that the test for recklessness applies at thetime the contract is entered into, but left open whether the test is thatthe vendor showed unacceptable indifference (the test in Selkirkv. Romar) or showed a falling short (the test from Jackson v.Hadens Contract).

    Unfortunately some decisions since 11 Suntract have potentially reinstated that judicial

    fumbling. For example, in Progressive Recycling Inc. v. 1530937 Ontario Inc.18, the Ontario

    Superior Court reverted to stating (or inferring) that the test at the time the contract is entered

    16 Grant v. Tiercel Digital Ltd. [1994] CarswellOnt 4539, 48 A.C.W.S. (3d) 1278 17 11 Suntract Holdings Ltd. v. Chassis Service & Hydraulics Ltd (1997) CarswellOnt 4804, [1997] O.J. No. 5003, 15 R.P.R (3d) 201, 36 O.R. (3d)

    328, 49 OTC 112, 76 A.C.W.S. (3d) 207) 18 Progressive Recycling Inc. v. 1530937 Ontario Inc., (2007) CarswellOnt 4163

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    into may be determined solely on the basis of whether the vendor had brought about the

    deficiency. That is not the test. The test is recklessness.

    However, there have been decisions that have worked to solidify 11 Suntract and to summarize

    in better terms the law of the land today.

    In Toth v. Ho19, the court added (or if not added, recharacterized) one important element of the

    consideration of whether a vendor can rely on the rescission clause. The court hived off matters

    of conveyance as being distinct from matters of title and stated that requisitions that are a

    matter of conveyance never lead to the right of rescission, because they are by nature matters that

    the vendor can compel the delivery of. The law has long recognized matters of conveyance as

    being subject to their own bucket of requisitions. The notion was that certain discharges of

    instruments (for example) are completely within the control of the vendor to obtain or deliver,

    and therefore the vendor cannot rely on the unable or unwilling concept in order to avoid

    delivering them on closing. In this case the court considered whether a requisition for the

    discharge of a closed mortgage was a matter of conveyance or a matter of title, and concluded

    that it was a matter then went to title because the vendor could not compel the discharge of a

    closed mortgage simply by redirecting closing funds to the mortgagee.

    A reasonable summary of the current state of the law is contained in the 2015 decision in

    Business Development Insurance Ltd. v. Caledon Mayfield Estates Inc.20, which decision

    19 Toth v. Ho (1998) CarswellOnt 5215 20 Business Development Insurance Ltd. v. Caledon Mayfield Estates Inc. (2015) CarswellOnt 4290, 2015 ONSC 1978, 253 A.C.W.S. (3d) 489, 54

    R.P.R. (5th) 300

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    provides us with confirmation that the following long-determined principles of equity will

    govern a courts determination:

    1. rescission is not readily available to a vendor who entered into the

    agreement recklessly and with full knowledge or his or her inability

    to remove a defect in title. This is considered at the time the vendor

    enters into the agreement. If the vendor has no knowledge of the title

    defect, or if the purchaser does have knowledge of the title defect,

    whether actual or imputed, a court is more likely to find that this

    limitation does not apply.

    2. for a vendor to rely on the annulment clause in an agreement of

    purchase and sale, the vendor must exercise his rights reasonably

    and in good faith. This means that those rights must not be exercised

    in a capricious or an arbitrary manner. This is considered at the

    time the vendor is asked by the purchaser to consider an objection

    to title. The court went to say that the vendor is obligated to act in

    good faith and to make efforts to rectify the defect in title that has

    been raised by the purchaser. However the law does not require the

    vendor to engage in litigation to remove an objection to title.

    3. A matter of conveyance was defined as an encumbrance which the

    vendor can compel and has a right to discharge. A matter of

    conveyance involves an element of control in the hands of the

    vendor to address the matter or thing to which the requisition

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    applies, and to compel or insist on the performance of a legal right

    to discharge that matter or thing. If a vendor is not entitled as a right

    to discharge an encumbrance, it is an objection to title. It is an

    objection to title that allows a vendor to rely on the annulment clause

    or right of rescission in an agreement of purchase and sale.

    Although the foregoing three principles are now considered good law in Ontario, one must be

    careful when relying on the distinction between matters of conveyancing and matters of title.

    Most of the cases before Toth v. Ho were careful not to rely on this particular distinction when

    determining whether the rescission clause was available, in part (for example) because there may

    be matters that are entirely within the vendors control to compel, but that it may only compel at

    great cost (and which in the absence of this distinction, a court might have found the vendor to

    be acting in good faith in declining to do). And so while this is the law, now doubly affirmed,

    this author considers the matter not yet completely explored.

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  • TAB 6

    Estoppel Certificates: What are They Good For?

    Absolutely Something!

    Melissa McBain, Daoust Vukovich LLP Kenneth Pimentel, Daoust Vukovich LLP

    September 19, 2017

    Commercial Real Estate TRANSACTIONS 2017

  • 1

    ESTOPPEL CERTIFICATES: WHAT ARE THEY GOOD FOR? ABSOLUTELY SOMETHING!

    Prepared By: Melissa McBain & Kenneth Pimentel

    Daoust Vukovich LLP

    Estoppel Certificates

    The delivery of estoppel certificates by vendors/borrowers to purchasers/lenders on or

    before closing or funding is typically a condition precedent in any purchase or financing

    transaction involving real estate that is encumbered by leasehold interests. However,

    misconceptions abound regarding the purpose, content and utility of estoppel certificates. Can

    purchasers, lenders or even vendors rely on the statements made by a tenant in an estoppel

    certificate to support a claim against, or defend a claim by, a tenant? Are tenants required to

    execute estoppel certificates and, if so, what information are they required to provide or confirm?

    Can leases be amended by the statements made in an estoppel certificate? Do purchasers derive

    any benefits from receiving executed tenant estoppel certificates? The purpose of this paper is

    to answer these and other important questions surrounding the use of estoppel certificates. But

    first, it is important to understand what estoppel certificates are and what they are not.

    What are estoppel certificates?

    An estoppel certificate (also referred to as a status statement or tenant acknowledgement)

    is intended to be a statement of facts that sets out the key terms of a lease or other agreement

    upon which the party requesting such information may rely.1 The utility of estoppel