Does the Failure to Obtain Financing Allow a Purchaser to Claim Frustration of Contract?

 In Commercial Litigation

Perkins v Sheikhtavi, (2019 ONCA 925) a recent decision by the Ontario Court of Appeal, is an appeal of a motion granting summary judgment and awarding damages arising from the failure to close a purchase of a home.

Background

The respondents had listed their home for sale in March 2017. There were multiple offers to purchase the home, and the appellant’s unconditional offer was accepted.

However, prior to closing, a policy announcement was made by the Government of Ontario; namely, the decision to create and levy the Non-Resident Speculation Tax on foreign home buyers, which caused real estate prices to drop.

On the date of closing, the appellant could not close as she had been unable to sell her own property, and could not obtain sufficient financing for the purchase.

The respondent then re-listed the property, and ultimately sold it for more than $600,000 less than the appellant had agreed to pay.

The Summary Judgment Motion

The respondent commenced a claim against the appellant seeking the difference in sale price between what the appellant had agreed to pay and the much lower re-sale price obtained. The respondent also claimed for carrying costs from the agreed-upon closing date with the appellant until the property was ultimately sold. The respondent brought a motion for summary judgment.

The appellant opposed the summary judgment motion on the basis that the policy announcement had frustrated the Agreement of Purchase and Sale, and brought her own motion to seek the return of her deposit.

The motion judge canvassed the doctrine of frustration of contract and found that while the policy announcement was a “supervening event”, it did not constitute a “radical change in obligation” to force the defendant “to do something radically different from what the parties agreed”.

The motion judge noted that the offer was unconditional, and held that the decision to not include a condition or term on financing was a deliberate risk taken by the appellant to make her offer more likely to be accepted.

As such, the motion judge granted the respondent summary judgment and ordered that the appellant pay the difference in sale prices of $619,112 as well as carrying costs.

The Appeal

On appeal, the Court of Appeal reviewed the law of frustration, noting that “a contract is not frustrated if the supervening event was contemplated by the parties at the time of contracting and was provided for or deliberately chosen not to be provided for in the contract”.

The Court of Appeal considered that the appellant should have reasonably known that there was a risk her home would not sell at the price she sought, but made an unconditional offer to purchase the respondent’s property anyways.

The Court of Appeal ultimately held that it was reasonable for the motion judge to conclude that the test for frustration was not met, as the policy announcement did not force the appellant “to do something radically different from what the parties agreed”. The Court of Appeal concluded that the contract was not frustrated, but instead breached by the Appellant, and dismissed the appeal.

Takeaways

This decision confirms that all of the elements of frustration must be present for a plaintiff to establish frustration, and that the existence of a supervening event does not automatically entitle a party to assert frustration of contract.

This decision is also a cautionary tale to potential home buyers and their realtors. In this decision, the Court of Appeal makes clear that parties assume risks with unconditional offers, and those who do make unconditional offers ought to be prepared to follow through with the transaction, even if there are supervening events before closing.

This blog post was written by Alexander Bissonnette, a member of the Commercial Litigation team.  He can be reached at 613-369-0358 or at Alexander.Bissonnette@mannlawyers.com.

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