No Frustration in New Government Policy

Purchasing a home, for many Canadians, is a significant financial decision. It is one that is often wrought with risk and challenges.

These complexities are increased when market forces or regulatory changes make make the purchase of a new home unaffordable. Unfortunately, these changes may be ones that a purchaser is stuck with, irrespective of the consequences.

The Ontario Court of Appeal reviewed one such case in Perkins v. Sheikhtavi, where the the purchaser made an unconditional offer to purchase a home in the suburbs of Toronto on April 3, 2017 for $1,871,000. As is common in the GTA, there were thirteen offers to purchase this home. Their offer was the second highest.

Only days after the offer was made, on April 21, 2017, the Province of Ontario introduced a Non-Resident Speculation Tax (NRST) of 15 per cent to residential homes in the Greater Golden Horseshoe Region (GGH), by individuals who are not citizens or permanent residents of Canada or by foreign corporations (foreign entities) and taxable trustees. Although the purchaser was not a non-resident as described by the NRST, they were still affected by this unexpected tax because the real estate prices in the area dropped by about 20 to 30 per cent, and the purchaser could not sell her own home or obtain sufficient mortgage financing. The seller was required to take the property back and put it on the market, where it sold for $1,251,888, or $619,112 less than what was agreed to in the purchase and sale agreement.

As a result, the purchaser claimed that the agreement of purchase and sale was frustrated by the NRST. She also claimed that there was an implied condition in the offer that it was conditional on being able to sell her selling her own home, and obtain the appropriate mortgage financing. The purchaser was unsuccessful on summary judgment on both these grounds, and the appeal was denied by the Court of Appeal.

The announcement of the NRST was a supervening event, it was not a frustration of the agreement. The Supreme Court of Canada defined this concept in Naylor Group Inc. v. Ellis-Don Construction Ltd. as follows,

53 Frustration occurs when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes “a thing radically different from that which was undertaken by the contract”: Peter Kiewit Sons’ Co. v. Eakins Construction Ltd., 1960 CanLII 37 (SCC), [1960] S.C.R. 361, per Judson J., at p. 368, quoting Davis Contractors Ltd. v. Fareham Urban District Council, [1956] A.C. 696 (H.L.), at p. 729.

Although older case law on frustration relied on an implied term theory, which contemplated whether reasonable people would have contemplated the supervening event at the time of contracting, courts have rejected this theory because it relied on subjective fictions and imputation of motives and intents. Instead, courts now rely on supervening events that result in a radical change in obligation, which occurs without fault of either party, that forces a part to do something radically different than what the parties agreed upon.

In this case, the purchaser chose to make an offer in the purchase and sale agreement which was absent any conditional term for financing. This was done specifically because she wanted her offer to be accepted, above and beyond other offers that might offer more money, but contained conditional terms. Her offer was accepted specifically because it was an unconditional offer. This was a knowing risk that she willingly undertook, and not a radical change in any obligation in the original agreement,

[15] Frustration applies to contracts including real estate transactions, when a supervening event alters the nature of the appellant’s obligation to contract with the respondent to such an extent that to compel performance despite the new and changed circumstances would be to order the appellant to do something radically different from what the parties agree to under their contract: Naylor, at para. 55.

[16] 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: Capital Quality Homes Ltd. v. Colwyn Construction Ltd. (1975), 1975 CanLII 726 (ON CA), 9 O.R. (2d) 617 (C.A.), at p. 626.

…

[18] In this case, the appellant deliberately chose not to include a condition that she had to be able to sell her home and obtain mortgage financing before closing as a term of her offer to purchase.

[19] She would reasonably have known there was a risk her home would not sell at the price she sought but made an unconditional offer to purchase the respondents’ home because she wanted her offer to be accepted (although she was not the highest bidder).

[20] The appellant was specifically told by her real estate agent that unless she put in an unconditional offer, her offer would not be accepted.

What made the purchaser’s situation even worse was that there was an entire agreement clause in the written agreement. This clause precluded any claims of an implied condition relating to the sale of the home or appropriate financing.

While desperation around the frenzied housing market in large Canadian cities often results in desperation for some purchasers, it’s important to remember that an unconditional offer comes with very significant and important risks that can carry burdensome liabilities for those who fail to follow through, even if the circumstances for these obligations are not entirely within their control.