How covid-19 has impacted time is of the essence clauses in real estate transactions

In recent months, we have witnessed the COVID-19 pandemic give rise to financial hardships and delays concerning real estate transactions. Specifically, two major issues may arise with regards to time is of the essence clauses and the pandemic. The first is where the financer or lender revokes its promise to provide funds to the purchaser before the close on a property. The purchaser then experiences issues obtaining funds and may not be able to close in accordance with the agreement of purchase and sale. The second issue occurs where a party to the agreement of purchase and sale fails to fulfill conditions or fulfills them late.

TIME IS OF THE ESSENCE IMPACT ON AN AGREEMENT OF PURCHASE AND SALE

A time is of the essence clause is commonly found in an agreement of purchase and sale and provides that all parties to the agreement must be ready, willing, and able to close by a specified date and time. An example of a time is of the essence clause is as follows, “Time shall be of the essence in this Agreement.” Failure to comply with a time is of the essence clause may result in a breach of contract, meaning that the defaulting party may owe a sum of money equivalent to the loss suffered by the other party. Also, the defaulting party may forfeit their deposit, and the other party to the agreement may be entitled to terminate the contract.

To rely on a time is of the essence clause, the party must be able to demonstrate that he or she was ready, willing, and able to close on the specified date and time and that it was not his or her fault that the defaulting party failed to close on the specified date and time.

The leading case on this point is De Palma v. The Runnymede Iron & Steel Company, 1949 CanLII 73 (ONCA).  It was decided a long time ago – but is still good law.

HOW THE COURTS INTERPRET TIME IS OF THE ESSENCE CLAUSES

In Time Development Group Inc. (in trust) v Bitton, 2018 ONSC 4384, an issue arose where a lender who provided a commitment backed out before the agreement of purchase and sale was scheduled to close because of changing market conditions. The purchaser made frantic efforts to find a replacement lender, but did not obtain the funds to close by the closing date. The purchaser made efforts to obtain an extension on the closing date to obtain alternative financing, but the vendor did not agree to the extension and sought to rely on the time is of the essence clause to terminate the agreement. In this case, the Superior Court agreed that the vendor had no obligation to provide the purchaser with an extension to find alternative financing and that the purchaser forfeited their deposit and was ordered to pay a portion of the legal fees incurred by the vendor. 

In Fortress Carlyle Peter St. Inc. v. Ricki’s Construction and Painting Inc., 2019 ONCA 866, (“Rick’s Construction”) which was affirmed by the Ontario Court of Appeal, a purchaser and vendor signed an agreement of purchase and sale that was conditional on the vendor’s ability to provide estoppel certificates for a tenant located at the property five days before the closing date of August 13, 2018, at 6:00 p.m.

The vendor initially provided the purchaser with one altered estoppel certificate that did not comply with the agreement. The correct estoppel certificate was not provided to the purchaser until shortly before closing. As a result, the purchaser requested an extension to close until the next day to review the certificates. At 6:00 p.m. the vendor confirmed that it would not provide an extension, and that it was ready and willing to complete the transaction. The purchaser proceeded to transfer the funds for the transfer at 6:20 p.m. but the vendor immediately claimed a breach of contract, that the agreement was terminated, and that the purchaser had forfeited their deposit for failing to comply with the agreement of purchase and sale. 

In this case, the Ontario Court of Appeal agreed with the lower court in that the vendor breached the agreement of purchase and sale and failed to act in good faith because it had provided the wrong estoppel certificate. The vendor was not entitled to terminate the contract as it was in breach of contract and specific performance was ordered. On a side note, the law provides that where both parties are found at fault for failing to comply with the agreement of purchase and sale, the contract remains “alive” with time no longer of the essence. Time of the essence in that case should be restored both parties agreeing to a new date for closing.

HOW TO PROTECT YOURSELF OR YOUR CLIENTS AND SOLUTIONS MOVING FORWARD

When utilizing a time is of the essence clause, both parties should clearly state the aspects of the agreement that are important to them and what the specific due date is. Purchasers who need to close on the property such as in Ricki’s Construction, should automatically advance the funds prior to closing so that one cannot assert breach of contract.

If the parties would like to make time is of the essence not apply, they should include an additional paragraph in the agreement of purchase and sale explaining where the clause would not apply, such as when the lender backs out of financing at no fault of the parties. An example of this clause is:

“The vendor agrees to extend the date for this agreement of purchase and sale by 30 calendar days if any mortgage lender(s) who have committed to providing closing funds to the purchaser withdraws their commitment within 20 calendar days before closing despite paragraph 20 of this agreement.”

Please feel free to contact us if you have any further questions or concerns.

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