A Case of ‘More’ of the Same? … It’s Really Just Another Case of Anticipatory Breach

Introduction

In the recent decision of More v. 1362279 Ontario Ltd. (Seiko Homes)¹ (“More”), the Ontario Court of Appeal considered the issue of whether relying on a “time is of the essence” clause to terminate a real estate agreement without a specified closing time constitutes an anticipatory breach of a contract.

Ultimately, the Court in More held that the vendor’s actions had constituted an anticipatory breach and also described the vendor as having acted in bad faith. This decision is a helpful reminder to real estate solicitors of the importance of including a specific closing time in agreements of purchase and sale. However, it is important to clarify that this decision does not provide a new interpretation of the “time is of the essence” clause, as other recent case comments have suggested.² Rather, it was the Court’s plain application of the long-established doctrine of anticipatory breach that grounded its conclusion that the vendor could not rely on the “time is of the essence” clause in this case. As well, this decision was not a result of the Court’s reading that a party’s bad faith behaviour can influence whether a “time is of the essence” clause is enforceable.

After providing a brief overview of the facts and outcome of the decision below, we argue that although the Court demonstrated that its findings of anticipatory breach – which amounted to repudiation of the agreements by the vendor ­– were grounded in authoritative case law, their conclusion that the vendor’s behaviour constituted bad faith was unnecessary and therefore underdeveloped. We conclude this article with two fundamental practice considerations relevant to parties to real estate transactions who find themselves vulnerable to similar risks.

Background and Holding in More

In More, three families, as purchasers, entered into three identical agreements with a vendor to buy three newly built properties in Windsor, Ont. The sales of the properties, which were intentionally purchased next to one another, were each set to close on October 1, 2020.

While none of the agreements stipulated a specific closing time on that date, each included a “time is of the essence” clause, which required that parties to the contract perform their obligations by the specific times stipulated in the agreements. Such clauses are standard in real estate transactions. However, the vendor’s lawyer had also signed a Document Registration Agreement (“DRA”) for each of the agreements, which provided, among other things, that if any of the agreements do not “specify a closing time and a release deadline has not been specifically inserted, the release deadline shall be 6:00 p.m. on the closing date.”³ The “release” in this context refers to the release of the transfer/deed to the purchaser’s lawyer for registration.

The vendor failed to provide the purchasers with an opportunity to conduct a mandatory Tarion New Home Warranty inspection of their new properties. The vendor also allegedly did not sever the properties in accordance with the Planning Act, a requirement necessary for proper registration.⁴ The purchasers began to worry whether the vendor was doing “everything in [its] power to [force the vendors] to walk away” amid rising real estate prices.⁵

On the closing date, the bank responsible for forwarding the mortgage funds to the purchasers’ lawyer to finance the purchases acknowledged that it was experiencing banking delays due to external factors related to COVID-19, staffing availability and an end-of-month spike in the volume of transactions. Therefore at 5:00 p.m. on that day, through no fault attributed to the purchasers, the vendor’s solicitor had not yet received the closing funds. Nevertheless, 11 minutes after 5:00 p.m. that day, the vendor’s solicitor faxed a letter to the purchasers’ solicitor terminating the agreements, asserting that the vendor was entitled to do so as the purchasers had been unable or unwilling to close at the impugned 5:00 p.m. closing time.⁶

In upholding Carey J’s trial level ruling⁷ that the closing deadline was in fact at 11:59 p.m. on the day of closing (curiously ignoring the 6:00 p.m. closing time set out in each DRA), the Court reasoned that the vendor could not rely on the “time is of the essence” clause when his lawyer faxed the letter and terminated the transaction early at 5:11 p.m.⁸ Finding this an anticipatory breach of the agreements, the Court also held that the purchasers continued to take real efforts to complete the transaction and therefore did not accept the vendor’s repudiation of the agreements. Without such acceptance, the repudiation was not effective so as to terminate the agreement. Therefore, the Court found that there was no basis to disturb Carey J’s findings that the vendor had acted unreasonably and in bad faith.

The result in More was that the purchasers were awarded specific performance of the agreements. However, in the following section, we explain why the takeaways for solicitors from this decision are narrow, and why we believe the Court’s choice to incorporate the doctrine of bad faith was unnecessary (obiter dicta) in coming to its decision.

More: A Case of Anticipatory Breach

An anticipatory breach occurs when a party to a contract makes a statement or an act that can be inferred as repudiating or renouncing its contractual obligations and declaring that it has no intention of performing them.⁹ As the Court in More did refer to bad faith, it may drive some to read the decision as finding that bad faith behaviour can prevent a party from relying on a “time is of the essence” clause. However, this decision is clearly an application of the findings of anticipatory breach in Domicile Developments Inc. v. MacTavish (“Domicile”)¹⁰ in a time where digital instruments such as DRAs and the Teraview registration system – which serves to access and register data in the Government of Ontario’s land records database – are now often integral and necessary for closing real estate transactions.

The decision of Laskin J.A. in Domicile remains the leading case in Ontario on anticipatory breach. In Domicile, Laskin J.A found that neither the vendor nor the purchaser of a newly built property was entitled to end or enforce their agreement because neither party had been “ready, willing and able” to close the transaction on the closing date.¹¹ In that case, the purchaser had made it clear before closing that he had no intention of proceeding with the transaction.¹² The vendor nonetheless chose to reject this anticipatory breach and kept the agreement and its “time is of the essence” clause alive. However, on the closing date, the vendor had not substantially completed the property and failed to provide the purchaser with a new suggested closing date. Despite the fact that the purchaser had no intention to close the transaction, these actions by the vendor kept the contract alive.¹³ The vendor went on to resell the property at a lower price, and sought damages against the original purchaser, relying on the “time is of the essence” clause and asserting that that purchaser had breached the agreement for failing to be “ready, willing and able” to close on the agreed-upon date. The Court held, however, that the vendor had also breached the agreement by reselling the property when the original agreement remained alive. Accordingly, the vendor could not rely on the “time is of the essence” clause. Therefore, Domicile provides that “time is of the essence” can only be relied on by a party who is itself ready, willing and able to close on the closing date, unless the other party accepts the repudiation of the contract.¹⁴

This situation is precisely what happened in More, where the finding of anticipatory breach was supported two-fold. First, the Court relied on another prior decision, Di Millo v. 2099232 Ontario Inc., in holding that the vendor in More could not rely on the “time is of the essence” clause because such a provision does not impose a time limit but rather “dictates the consequences that flow from failing to comply with a time limit stipulated in an agreement.”¹⁵

Second, the Court cited Domicile, for the proposition that an innocent party must itself be “ready, desirous, prompt and eager” in order to take advantage of the “time is of the essence” clause.¹⁶ The Court reasoned that, by terminating the transaction early at 5:11 p.m., the vendor had clearly not been willing to close on the agreed-upon time.¹⁷ This is analogous to their ruling in Domicile where the Court found that the “time is of the essence” clause could not be relied on by the vendor, as they were not ready, willing or able to close; the reasoning for ordering specific performance as a remedy for the purchasers in More should have ended here.

The duty of good faith as an organizing principle in contracts was first recognized by the Supreme Court of Canada in Bhasin v. Hrynew in 2014.¹⁸ Although a seminal principle with far-reaching applications, in More, discussing bad faith was not necessary and did not contribute to the decision that the vendor could not rely on the time being of the essence. Although the Court agreed with the Carey J’s finding that the vendor had acted in bad faith three times throughout the decision, both levels of court failed to ground this finding by citing any case law in support. It is therefore our view that this case does not open the door for an interpretation that a “time is of the essence” clause can be more loosely applied where the opposing party demonstrates bad faith.

Practice Tip 1: Real Estate Solicitors and the Availability of Gap Coverage Provided by Title Insurance

Although land registration through Teraview is only available Monday through Friday from 8:30 a.m. to 5:00 p.m.,¹⁹ there is no rule that real estate transactions cannot close outside these hours. In More, the vendor’s solicitor argued that closing could be no later than 5:00 p.m. because the Teraview registration system does not permit transfers to be electronically registered past that time. This argument appears to be based on the risk in real estate law arising from the vulnerability of properties to the registration of intervening encumbrances on title during the time between closing and title registration.

However, both the vendor’s solicitor and the Court, in addressing the vendor’s arguments, omitted a relevant piece of information, namely that this may be a risk that the purchasers were prepared to take and that this risk is easily ameliorated through title insurance which contains a gap coverage endorsement. Such coverage – which is automatically included without additional cost in the residential and commercial policies of the four largest and most common title insurance providers in Ontario²⁰ – allows funds and keys to be released to the respective parties without having to wait for the transfer/deed to be registered. This enables transactions to close on time as it insures the purchaser’s title against any intervening registrations.

Although not mandatory, most purchasers of residential properties in Ontario buy title insurance through their lawyers during the closing process of a real estate transaction. While it is technically possible that the purchasers in More had not purchased title insurance, it is nonetheless of concern that this discussion was completely omitted. In any case, parties to real estate transactions and their lawyers should be aware that this risk of intervening encumbrances between closing and registration can be managed in almost every real estate transaction if title insurance is purchased from any current title insurance provider.

Practice Tip 2: Amend OREA Forms and DRAs to Have Standard 5:00 p.m. Closing Times

Aside from the availability of gap coverage, the most overt takeaway from More is that all real estate agreements should clearly indicate a precise time for closing.

The Ontario Real Estate Association (“OREA”) produces the standard form for agreements that are used in virtually every residential real estate transaction in Ontario. Paragraph two of the standard OREA residential agreement of purchase and sale, although amendable, currently provides that closing time be no later than 6:00 p.m. on the date of closing. We encourage OREA to modify the standard OREA residential agreement to amend the standard 6:00 p.m. closing time to align with the 5:00 p.m. cutoff of land registration through Teraview to avoid this confusion in the future. Unless and until OREA makes this amendment, we highly recommend that real estate solicitors independently amend residential real estate agreements to provide for a 5:00 p.m. closing time or obtain title insurance.

Conclusion

Even if OREA makes this necessary modification, it will remain critical that solicitors stipulate clear closing times and ensure that all parties understand the relationship between the agreed-upon closing times, the available coverage endorsements for gaps between closing and registration, and the consequences of attempting to rely on time being of the essence in unclear circumstances.

Although the decision falls short of providing clear guidance as to how parties to these transactions can and should conduct themselves when confronted with similar contractual risks in the future, it is our hope that this article will be of assistance to real estate solicitors.

If you require any assistance with the foregoing, please contact the Aird & Berlis Real Estate Group.