In a recent case (Lucas et al v. 1858793 Ontario Inc. o/a Howard Park et al., 2019 ONSC 7402), a condo developer was unsuccessful in its attempt to terminate a pre-construction agreement of purchase and sale and keep the deposits.
In January of 2015, the purchasers entered into an agreement (the “Agreement”) to purchase a unit in a condominium to be constructed. The purchase price was $369,000. Over the course of the next few years the purchasers paid deposits totalling almost $75,000. After the interim occupancy closing in April of 2018, the purchasers paid monthly occupancy fees in the amount of $1548. Although the purchasers took possession of the unit, they did not move in, but allowed someone they knew, Renate Duarte, to move in May 1, on a rent-free-basis without any lease or written rental agreement.
During the summer of 2018 the developer was addressing deficiencies in the unit. The developer advised the purchasers that it could not correct all the deficiencies as Mr. Duarte did not allow the developer access to the unit. In September of 2018 the developer advised the purchasers that the Agreement prohibited leasing of the unit during the interim occupancy period without the developer’s consent. The purchasers immediately responded stating that Mr. Duarte was not leasing the unit as there was no lease and the purchasers were not receiving any compensation from Mr. Duarte. (However, in earlier correspondence between the purchasers and the developer’s employees Mr. Duarte was referred to as the tenant and the purchasers’ insurance documentation indicated that the unit was leased.) Mr. Duarte moved out of the unit on October 1, 2018 after being arrested by the police. No further mention was made of the alleged breach in October or November of 2018.
Meanwhile a dispute arose between the developer and the purchasers about a gauge in the bathtub. The purchasers insisted that the tub be replaced. In communications between the parties in December of 2018 and January, 2019 the developer stated that unless the purchasers signed off on all deficiencies (even though the bathtub had not been replaced) the developer would pursue the purchasers for breach of the Agreement. The purchasers did not back down from their position that the bathtub needed to be replaced and eventually it was replaced by the developer. In February of 2019, after the condominium had been registered, the developer wrote to the purchasers advising that the Agreement was being terminated and all deposits and occupancy fees previously paid were being forfeited as liquidated damages as the purchasers had committed a fundamental breach of the Agreement by leasing the unit without the developer’s consent.
The developer then entered into a new purchase agreement with relatives of one of the principals and directors of the developer. The purchase price of the unit was $418,000, with a $5,000 deposit and $13,000 payable on closing, with the balance of the purchase price to be satisfied by a promissory note.
The purchasers commenced an application requesting relief from forfeiture and specific performance of the Agreement. The purchasers registered a caution on title which prevented the subsequent sale of the unit. At the time that the application was heard, the market value of the unit was estimated to be between $490,000 and $520,000, approximately 40% more than the purchase price in the Agreement.
The following issues were before the Court for determination:
- Was there a breach of the Agreement by the purchasers?
- If there was a breach, was it a fundamental breach that entitled the developer to terminate the Agreement?
- If there was a breach, was it waived by the developer?
- Were the purchasers entitled to relief from forfeiture and specific performance of the Agreement?
The Court concluded that there was no breach of the Agreement, as there was no lease and no compensation paid by Mr. Duarte for use of the unit – the unit was only being loaned to Mr. Duarte. Even if there had been a breach, the Court determined that it was not a fundamental breach as the developer did not take steps to terminate the Agreement shortly after becoming aware that Mr. Duarte was occupying the unit, but instead, treated the Agreement as still being in force and continued to accept monthly occupancy fees from the purchasers. Accordingly, the developer waived its right to terminate the Agreement and take the deposits as liquidated damages.
The Court ordered specific performance of the Agreement as this would provide the purchasers with a more complete and just remedy for the developer’s failure to close the transaction. Awarding damages would not put the purchasers in the position that they would have been in had the Agreement been performed. In view of the fact that the market value of the unit had increased substantially since the Agreement was signed, the purchasers’ ability to acquire a comparable unit would be detrimentally affected if specific performance of the Agreement was not ordered.
The new purchase agreement was declared null and void, with the Court concluding that it was a sham, as it was a non-arms-length transaction on terms that were not commercially reasonable.
As all of the arguments supporting the developer’s position were rejected by the Court, this was a clear win for the purchasers, who were also awarded costs.