Avoiding Litigation in a

Real Estate
Market and what happens if its unavoidable

OR

Igor Ellyn, QC, CS

Kathryn J. Manning

ELLYN BUSINESS COUNSEL

Barrister and Solicitor

T: 416-238-7461 E: kathryn@kjmanning.com
www.kjmanning.com

T: 416.365.3750 E: iellyn@ellynlaw.com
www.ellynlaw.com www.ellynadr.com
Igor Ellyn & Kathryn J. Manning

Who We Are and What do Litigation Lawyers Know

About Real Estate Transactions?
Igor Ellyn
Toronto business and property litigation
lawyer for more than 40 years
Author, Litigating and Arbitrating Business
Disputes (Lexis-Nexis Canada 2015), two
other books and 50 articles on litigation
matters and frequent speaker on legal
topics
Past President, Ontario Bar Association
Chartered Arbitrator and Mediator
Chair, Toronto Chapter, CIArb.
Counsel in many cases which have gone to
trial or appeal, including aborted real
estate transactions
Former senior partner of a five-lawyer
business litigation boutique. Since 2015,
independent practice and collaboration
with
KateJ. Manning
Manning on some matters
Igor Ellyn
& Kathryn

Kathryn (Kate) Manning

Toronto business litigation lawyer for more

than 18 years
Practiced in the commercial litigation
groups of two of Canadas largest law firms
for more than 15 years
Practiced at a specialized boutique law
firm focusing on electronic document
management and e-discovery for 2 years
Commenced an independent litigation
practice in Toronto in 2015
Many years of experience as counsel on
business and contract litigation
Frequent speaker at professional legal
education sessions on commercial litigation
topics

We know quite a lot about what happens

in real estate litigation Thank you for 2
allowing us to share it.

How Real Estate Deals Can Go Wrong

Purchaser does not have the closing funds

Vendor decides not to sell

Vendor sold the property to someone else

Vendor does not own the property

Vendors spouse refuses to sign the transfer

Mortgagee refuses to advance closing funds

Title defect, lien, execution, misdescription, easement, right-of-way

Vendor owns adjoining unsubdivided lands

Inspection discloses serious construction problems

Property is damaged by fire or other hazard before closing

Property is condemned by Building Department

One party dies or becomes incapacitated

Purchaser asks for an abatement which the Vendor refuses to give

Igor Ellyn & Kathryn J. Manning

Legal Issues which Affect the Closing

Ambiguous terms in the Agreement of Purchase and Sale

Latent Defects undisclosed construction or other issues

Wrong description of land or building

Title issues construction or tax liens, judgments, CPLs

Failure to pay secondary deposits

Purchasers inability to obtain closing funds locally or from abroad

Vendor refuses to close or alleges breach by Purchaser

Purchaser refuses to close and alleges breach by the Vendor

Vendor cannot close because of a title, land or building problem

Anticipatory breach by either party before the closing date

Igor Ellyn & Kathryn J. Manning

Consequences of the Deal Not Closing

Purchaser does not become the owner of the property

Vendor does not get the closing funds

If Purchaser breached, Vendor claims forfeiture of the deposit

If Vendor breached, Purchaser may suffer damages

There may be a domino effect on other deals due to lack of funds

Each party might want to start a lawsuit

If Vendor refuses to close, s/he will look for breaches by the Purchaser

If Purchaser refuses to close, s/he will look for reasons for not closing

Purchaser may want an abatement of the purchase price due to a value reduction

Vendor could claim against the realtor for deposit

Purchaser could make a Third Party indemnity claim against the realtor

Igor Ellyn & Kathryn J. Manning

Remedies When the Deal Does Not Close:

What can the Purchaser Do?

If the Vendor refuses to close, the Purchaser has the following options:

Terminate the Agreement, ask for the deposit to be returned

Sue for damages for extra cost of purchasing a comparable property and other expenses

Damages could include alternate living expenses, interest, moving and legal costs

Keep the Agreement alive and claim specific performance of residential property Purchaser has
to prove the property is unique more on this later

Purchaser can also claim damages in addition to specific performance

Purchaser has to mitigate his/her damages reasonably by looking for comparable properties and
making reasonable offers on them - more about this later

Ask for an abate of the purchase price if the was a hidden construction or property dimensions
defect

Ask for a Vendor and Purchasers Motion to resolve a title defect.

Igor Ellyn & Kathryn J. Manning

Remedies When the Deal Does Not

Close: What Can the Vendor Do?

If the Purchaser refuses to close, the Vendor has the following options:

Claim the agreement is terminated and forfeit the deposit more about this later

Claim additional damages, if any wont happen in a hot real estate market

Ask for an abatement of the purchase price if there is structural or lot size issue

Claim specific performance to require the Purchaser to close never happens

Ask for a Vendor and Purchasers Motion to resolve a title disagreement

Put the property back on the market immediately to mitigate damages

If there is doubt about whether the Purchaser or the Vendor breached the agreement, the
Vendor could agree to return the deposit and quickly re-sell the property and in this
market, probably at a higher price

Igor Ellyn & Kathryn J. Manning

Legal Issues Concerning Refusal to Close?

Anticipatory Breach

Refusal to close on the closing date

Vendors refusal to close

Purchasers refusal to close

Time is of the essence

Breach by the other party?

Misrepresentation by Vendor

Principle of Honest Performance of Contracts

Request for Abatement

Title Defect: Vendors and Purchasers Motion

Igor Ellyn & Kathryn J. Manning

Specific Performance: When is it Available?

Specific Performance is a declaration of the Court, which directs the Vendor (or rarely,
the Purchaser) to complete the transaction with adjustments for interest, damages and
legal costs created by the delay between the aborted closing date and Courts decision.

Until 1996, Specific Performance was the most common legal remedy for a Vendors
breach of a land sale transaction.

The 1996 Supreme Court of Canada decision in Semelhago v. Paramadevan, 1996

CanLII 209, changed this.

Specific performance will be granted only if the plaintiff can show the property is unique
in the sense that it has a quality which cannot be readily duplicated elsewhere. This
quality should relate to the proposed use of the property and it must be particularly
suitable for the purpose for which it was intended.

An objective assessment of uniqueness requires that a reasonable person familiar with

the facts surrounding their purchase and sale agreement would consider the property to
be unique: Gillespie v. 1766998 Ontario Inc.,2014 ONSC 6952(CanLII) paras. 2, 32-33.

Even where the Buyer claims specific performance, the Buyer must look for comparable
properties and convert the claim to an action for damages if s/he buys another property.

Igor Ellyn & Kathryn J. Manning

Specific Performance: No longer Available for

Commercial Real Estate

Specific performance is only for residential transactions.

In Southcott Estates Inc. v. Toronto Catholic District School Board,2012 SCC 51, the
Supreme Court held that even a residential property development with special features was
just an investment and did not meet the test of uniqueness. Even uniquely good real estate
investments are unique only in the sense of having good prospects for profitability.

Lost profits arising from breach of contract are compensable in money damages.

Similar conclusions were reached by the Court in cases involving apartment developments in
Hunters Square Developments Inc. v. 351658 Ontario Ltd 2002 CanLII 9163 (ON CA) and
Domowicz v. Orsa Investments Ltd.1993 CanLII 5472 (ON SC),varied ONSC)
1998 CanLII 17748 (ON CA).

An exception to this principle is the recent decision of the Ontario Superior Court in
Gillespie v. 1766998 Ontario Inc., 2014 ONSC 6952, where Justice Myers allowed specific
performance of a large rural property near Kingston, which two university art professors
intended to use as their home, art studio and International Summer Artist Residency.

This was an unusual case. The judge appears to have been especially sympathetic to the
Igor Ellyn & Kathryn J. Manning
10
Plaintiffs unique situation. It appears that the Defendant did not appeal.

Keeping the Agreement Alive v.

Terminating the Agreement

When one party breaches a contract, the innocent or non-breaching party

typically takes the position that the contract is over and s/he is suing for
damages. This is important because ending the contract relieves the
innocent party from further performance of the contract.

With the contract terminated, the innocent party then uses best efforts to
reasonably mitigate damages --- by looking for comparable properties and
making reasonable offers, and then sues for the losses suffered as a result of
the other partys breach.

However, if the innocent party the Purchaser intends to claim specific

performance, the agreement must be kept alive. The Purchaser then says, I
am ready, willing and able to perform my part of the contract.

To ensure that the property will not be sold while the litigation is proceeding,
the Purchaser will seek an order to issue a Certificate of Pending Litigation
(CPL) and sometimes, a Caution. More about this later.
Igor Ellyn & Kathryn J. Manning
11

When can the Agreement be Terminated?

Of course, the Buyer and the Seller can always agree to terminate the agreement.

Section 10 of the standard OREA APS states that the APS is to be terminated if there
is a valid title objection which the Seller cannot remove and which the Buyer will
not waive. The kinds of objections which fall into this category can be complicated
and are outside the scope of this discussion.

Rescission or Repudiation? Two Confusing Terms As the SCC explained in the

Guarantee Co. of N.A. v. Gordon Capital Corp. 1999 CanLII 664 (SCC) para. 39:

Rescission: If one party, say the Buyer, claims a material misrepresentation or fraud in
respect of the contract, such as a significant misdescription or the Seller is not the owner
or for example, there is UFFI problem, the Buyer can rescind the contract and get back
the deposit.

Repudiation: Where one party says I will not perform my obligations under the
agreement, the other party can respond, depending on what the refusal to perform is, by
saying essentially the contract is terminated because of your refusal to perform. Note
that you dont need to say these precise words.

Igor Ellyn & Kathryn J. Manning

12

What Types of Refusals to Perform Allow the

Other Party to Repudiate the Agreement?

Not every breach by one party allows the other party to say that that the contract is
terminated. The breach has to be a fundamental breach.

The SCC described a fundamental breach as a failure of a partys performance of its

obligations under the contract that deprives the other party of substantially the
whole benefit of the agreement.

If the Buyer says, I am not paying the deposit, that is a fundamental breach. Courts
have held that even if the Buyer wants to pay the deposit later than the APS provides,
the Seller can refuse and declare a fundamental breach; however, it may depend on
how much later. Later the same day is different from several days later, for example.

It could be different, however, if the Buyer pays a deposit late and the Seller accepts
it. The Seller is probably not able to terminate at a later time because the breach has
been remedied and is no longer fundamental. Sometimes, the innocent party has
waived the other partys breach by its conduct or is estopped from relying on the
other partys breach.

Igor Ellyn & Kathryn J. Manning

13

Fundamental Breach

Another example of fundamental breach is the refusal to close on the closing date. Justice
Morgan recently held that a Seller was right to refuse to close when the Buyer wanted to delay
the closing by two days: 2336574 Ontario Inc. v 1559586 Ontario Inc., 2016 ONSC 2467.

However, another case said that a delay of less than an hour on the same day in delivering the
closing funds was not a fundamental breach and the purchaser was entitled to close the deal :
Walker v. Jones, 2008 CanLII 47725.

If the Seller says I am refusing to close, that is a fundamental breach. The Buyer then must
decide if s/he wants to keep the contract alive and claim specific performance or terminate the
contract and sue for damages.

The Courts have established five criteria to determine whether a breach is fundamental enough
to justify the non-breaching party to terminate the contract:

1) Was the breach remedied?

2) Was the breach trivial in relation to the partys whole performance under the APS?

3) Did the other party consider the breach serious when it occurred?

4) Is there a possibility of repetition of the breach?

5) Did the non-breaching party suffer any damages?

Igor Ellyn & Kathryn J. Manning

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Time is in all respects of the essence

Section 20 of the OREA APS contains this standard clause. It means that each of the
parties has an duty to perform their part of the agreement at the time when the APS
states and that if a party does not do so, that is a reason for terminating the
agreement.

In other words, the APS makes every time breach, even trivial ones, fundamental.

However, the Courts have held that a trivial breach of time may not permit the
other party to rely on the time is of the essence clause. Also, if one party accepts
variations of time in performance of some parts of the agreement, that party may
not be able to rely on a short delay on another time limit. It is difficult to give
examples because the result will depend on the particular facts of the case.

Judges will sometimes weigh (often without expressly saying so), who are the
innocent parties and who are the parties in breach. If the judge thinks that one
party is acting in a commercially unreasonable manner to try to get out of the
agreement, that could affect the right to use the time is of the essence clause.

Igor Ellyn & Kathryn J. Manning

15

Principle of Honest and Good Faith Performance

In the SCC case of Bhasin v. Hrynew, 2014 SCC 71, the Court held that there is a
principle of honest performance of contracts. Contracts must be performed in good
faith by both parties.

This means that parties must not lie or otherwise knowingly mislead each other
about matters directly linked to the performance of the contract. The duty of good
faith is a general doctrine of contract law that imposes a minimum standard of
honest contractual performance.

There are now hundreds of cases in which lawyers and judges put a different spin on
how far the principle of honest performance goes. It probably prevents a party from
alleging very trivial breach to try to get out of the contract but how trivial a breach
is often depends on which side of the case you are on.

In the case of 2336574 Ontario Inc. v 1559586 Ontario Inc., 2016 ONSC 2467, the
judge decided that honest performance did not mean that everything had to be
flexible or approximate. The starting point for good faith performance is to perform
the APS according to its written terms

Igor Ellyn & Kathryn J. Manning

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Action for Damages

This is a lawsuit by one party to the APS against the other. In a rising market, the
claim will typically be by the Buyer against the Seller for refusing to close the deal.

The Buyer has to prove that the Seller breached or anticipatorily breached the
contract to succeed.

The Buyer has to prove damages: What loss has the Buyer suffered? There will be
losses associated with 1) looking for a new house; 2) alternate accommodation; 3)
additional moving expenses; 4) additional legal fees; and 5) the big one: the cost of
buying a comparable property.

The measure of damages is to put the plaintiff in the position he would have been in
if the contract had been performed: Hamilton v. Open Window Bakery Ltd., 2004
SCC 9, para. 17.

This means that if purchasing a comparable property would cost $500,000 more than
the property under the APS, the Vendor could be liable for these damages. However,
another property will only be comparable not identical. This may affect the amount
of damages.
Igor Ellyn & Kathryn J. Manning
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Duty to Mitigate Damages

Mitigation means that the plaintiff or non-breaching party has to do all s/he can to make
the loss as small as possible, acting reasonably: Southcott Estates Inc.v.Toronto
Catholic District School Board, 2012 SCC 51.

This means that a Buyer has to begin looking for comparable properties right away and
make offers on properties that are comparable. If the claim is just for damages, there
is a serious issue when the price of a comparable property is $500,000 more the price of
the property on the aborted deal. However, if the Buyer fails to attempt to mitigate, the
Court may be unable to award damages because the Buyers loss has not crystallized.

If the Buyer seriously attempts to mitigate but cannot find a comparable property at a
reasonable price, the measure of damages may be the difference between the price of
the property under the APS and the price at the time the action was commenced.
However, in a rising market, there is a strong case to be made that the date for
assessing the loss should be the date of trial.

If the Seller claims the attempts to mitigate are not sufficient or reasonable, the Buyer
has the onus to prove this. On the other hand, if the Buyer says mitigation is impossible,
the
onus
of proof shifts to the Buyer to explain why s/he could not mitigate. 18
Igor Ellyn
& Kathryn
J. Manning

Forfeiture of Purchasers Deposit

The deposit under the APS has two purposes. 1) It is a good faith payment to show that the
Buyer is serious about the transaction; and 2) It is applied against the purchase price on
closing.

In contract law, it is also generally understood that if the Buyer breaches the APS by not
closing the deal, the Seller has a right to claim the deposit as liquidated damages, which
means an approximate pre-estimate of the loss the Seller will suffer as a result of the
breach.

Many agreements in commercial transactions actually have a clause that if the deal does not
close by reason of the Purchasers breach, the deposit is forfeited to the Vendor. However,
interestingly, the standard OREA APS has no such clause.

In a rising market, the Seller probably suffers no damages as a result of the Buyers refusal
to close. Therefore, forfeiture of the deposit could be punitive to the Buyer. If the Court is
satisfied that the forfeiture of the deposit would be a penalty, the Court can give the Buyer
relief against the forfeiture.

The broker is required to hold the deposit until parties agree to release it or an order of the
Court. Therefore, there will often be negotiations about the split of the deposit depending
on &the
strength
Igor Ellyn
Kathryn
J. Manning of each partys position in the case.
19

Protecting the Property Cautions and

Certificates of Pending Litigation (CPL)

If the Buyer is claiming specific performance of the APS, the Buyer can register a Caution
against title under either sections 71 or 128 of the Land Titles Act. Both of these tools
prevent dealings by the Seller with the land for a specific time unless earlier removed by
Court Order or by the Director of Titles on notice to the Buyer.

A section 71 Caution is in support of an Agreement of Purchase and Sale. The Buyer has
to deposit the LTT immediately. The Caution expires 60 days after the closing date in the
APS.

A section 128 Caution is in support of the Buyers claim for an ownership interest in the
property, such as a claim for specific performance. This Caution expires 60 days after it
is registered. This might be useful as a stop gap until a CPL is obtained becuase it can be
done more quickly.

Where the Buyer claims specific performance, a CPL will also be claimed. This requires a
motion to court without notice but on full disclosure of the facts and upon making an
undertaking to pay any damages that result from the registration. If the Court grants the
Order for a CPL it is registered on title. The Seller can go to court on notice to the Buyer
Igor Ellyn & Kathryn J. Manning
20
to remove it if the CPL was not properly obtained.

What a Realtor can do to Avoid Litigation #1

Make sure agreement terms are unambiguous.

Make sure the parties understand all the terms of the agreement.

Many parties do not speak English well and do not understand legal terms.
Do they need a translation or legal advice before the offer is submitted?

Where is the balance between making an offer in a hot market and the
parties not understanding the terms of the deal?

If there is a construction or property issue, the Vendor must disclose it.

If there have been renovations, was there a building permit?

Were the renovations done under the Ontario Building Code?

Avoid handwritten changes to the agreement whenever possible.

If there are handwritten changes, ensure they are very legible.

Igor Ellyn & Kathryn J. Manning

21

What a Realtor can do to Avoid Litigation #2

If there are some red flags of problems with a house or property, ensure that
the Seller gets an inspection report from an independent and reliable expert.

Get Building Department clearance that there are no work orders.

Ensure that deposits are paid by certified cheques.

When there is a long closing, get additional deposits.

If there is a problem with any payment, notify the Vendor immediately.

Where are the closing funds coming from? How does the realtor know that
the Purchaser will have the money to close the deal?

If the closing funds are coming from abroad, be diligent about finding out the
source and when the money will be available.

Communicate: Let the Buyer and the Seller know what is going on,
especially in co-representation situations. Document all conversations by
Igor Ellyn & Kathryn J. Manning
22
email in clear language.

Dont be Afraid to Ask for Advice.

Your broker and manager might be more experienced than you. Dont
hesitate to ask at the first sign of a problem with a deal.

When a problem arises, you might be afraid to disclose because it might

jeopardize the deal. This is always the wrong approach.

Disclose. Disclose. Disclose.

Prompt and full disclosure will enable the parties to work matters out
and could prevent you or the brokerage from being sued by the parties.

Stay on top of developments in procedure and law.

Ask a lawyer for information, including us.

Igor Ellyn & Kathryn J. Manning

23

Useful Law and Helpful Charity!

In 2015, I published a book called Litigating and

Arbitrating Business Disputes

You may find a lot of interesting and useful material in it.

The book is sold by LexisNexis Canada online for $115 per

copy.

I have 10 copies which I will be pleased to autograph and

distribute for donations of $40.00 or more per book to
Evas Place, 360 Lesmill Road, Toronto (www.evas.ca),
a 40-bed emergency shelter, for homeless youth ages 1624 years. Since all of us here are interested in providing
the best housing, this is an opportunity to help less
fortunate young people who need to get back on track
with their lives.

I will request a tax receipt in your name for anyone who

donates $50 or more.

Closing the Presentation!

We hope this presentation provided you with some useful

insights about what happens when a real estate does not
close.

Thank you for inviting us.

Igor Ellyn, QC

Iellyn@ellynlaw.com

416-365-3750

Igor Ellyn & Kathryn J. Manning

Kate Manning
kathryn@kjmanning.com
416-238-7461
25