Reacting to repudiation: A cautionary tale for vendors in today’s market

274

By Rachel Puma
Robins Appleby

We are starting to see the impact of rising interest rates on the ability of purchasers to close their real estate transactions. Appraisals are coming back lower than expected or previously valued, which results in the purchaser being unable to obtain sufficient financing to close. This is particularly true in the world of new home construction, where purchasers may have entered into agreements of purchase and sale one, two, three years ago, or more, when interest rates were low and the real estate market had a more favourable outlook.

With more and more purchasers not being able to close on their purchases, vendors would do well to remember the doctrine of repudiation, and how their actions impact this doctrine. In short, if a party to an agreement evidences that an intention not to be bound by the contract before performance is due (states that it will not be able to complete the transaction), this is a repudiation of the agreement which entitles the innocent party to terminate the agreement without limiting their rights under the contract or at law, if applicable. However, if the innocent party does not expressly terminate the agreement after the repudiation, the agreement remains alive.

Performance of obligations

The innocent party’s need to expressly accept the repudiation and terminate the agreement is key. If the innocent part does not do so, the agreement remains alive and both parties are bound to perform their obligations. In the recent case of 2174372 Ontario Ltd. v. Galib N.N. Dharamshi and Khadija S. Dharamshi (“2174372 v Dharamshi”) a purchaser repudiated the agreement, but the vendor did not terminate the agreement in response. The Superior Court and Court of Appeal both found that the purchaser was ready to close the transaction on the closing date, but the vendor was not. Accordingly, the vendor was found to be in default of the transaction and was required to return the deposit, among other costs.

In this case, the new home agreement was scheduled to close on Nov. 8, 2018. At various times in 2018 – including July 17, Aug. 21 and Oct. 29 – the Dharamshi’s advised the vendor that they would be unable to close due to insufficient finances. There is no dispute that this was a repudiation and that the vendor did not expressly terminate the agreement based on this repudiation.

When it came time to close, the vendor’s lawyer attempted to tender on the purchasers (confirm the vendor could close), and was surprised to receive a tender letter from the purchasers’ lawyer in return. The purchasers’ lawyer advised that the purchaser had inspected the house which was “no more than a shell” and not substantially completed as required for closing. It is undisputed that the home was not substantially complete and therefore the vendor could not close.

Moral of the story

Interestingly, the purchasers were able to close only on the closing date as a result of a loan from a family friend. The purchaser did not advise the vendor that it had the money, nor did it wire the money to the vendor’s lawyers (instead it was deposited into the purchasers’ lawyer’s trust account and a copy of a certified cheque was tendered). The purchaser also would not accept the vendor’s two-day extension to substantially complete the home. You can take what you want from this about the purchasers’ true intentions, but the courts decided that this was irrelevant as the purchasers could comply on the closing date and the vendor could not.

The moral of the story here is that vendors need to either: (a) be ready to close on the closing date, regardless of a purchaser’s previous communications, or (b) expressly accept a purchaser’s repudiation and terminate the agreement. The former includes all action the vendor would typically take, including trying to arrange a pre-delivery inspection before the closing date for new homes.

Rachel Puma is an Associate at Robins Appleby. robinsappleby.com