Backing out of a commercial real estate purchase doesn’t have to cost you your deposit.
Any buyer who terminates a binding Agreement of Purchase and Sale (APS) should expect the vendor to move for the forfeiture of their deposit immediately. In a depressed market, an innocent seller may even be entitled to further damages to make up the difference between the sale price agreed in the failed deal and any lower bid they ultimately accept.
However, purchasers who successfully shift the blame for the collapsed deal to the vendor may be able to recover their deposit, even if they were the ones to call it off.
That’s what happened in the case of EPRF Holdings Limited v. Fergus Bloor Inc., where the Court of Appeal upheld a trial judge’s decision to side with an abortive buyer, finding that they were justified in cancelling the deal in line with a standard clause in the APS.
The facts
The dispute in the case revolved around a $7-million deal for a commercial property owned by EPRF Holdings. Under an Agreement of Purchase and Sale, buyer Fergus Bloor paid a $350,000 deposit ahead of a closing date set for April 1st, 2020.
The APS contained a standard clause allowing the buyer to set a deadline for removing “any valid objection” or “outstanding work order or deficiency notice” and trigger termination in the event of the seller’s failure to meet it.
As the closing date approached, Fergus asked EPRF to remove two outstanding work permits it had identified on the property issued by the City of Toronto. The seller claimed to have deleted them on March 18, 2020, but Fergus subsequently discovered that one remained in place.
With just one day left until closing, Fergus said it was still willing to close if the work permit was deleted before finally terminating the APS on April 1st, 2020, despite EPRF’s offer of an undertaking and indemnity. The permit was in fact deleted a few days after the termination.
EPRF sued for payment of the deposit plus damages for breach of the APS, while Fergus counterclaimed for the return of its $350,000. On a summary judgment motion, Ontario Superior Court Justice Andra Pollak came down in favour of the buyer, finding it was entitled to terminate the APS as a result of the seller’s inability to convey “good and marketable title.”
The onus was on EPRF to either have the work permit removed or offer insurance, and Fergus Bloor was under no obligation to accept its alternative solutions, she concluded, prompting the seller to appeal.
The results
The unanimous three-judge appeal panel sided with Fergus Bloor, finding no errors in the lower court judge’s ruling.
Although the motion judge’s decision involved the interpretation of a standard form contract, the appeal panel concluded that her conclusions should not be reviewed on a “correctness” standard, since she was required to make a mixed finding of fact and law with respect to the parties’ rights and obligations under the APS.
As a result, the appeal court was required to defer to the motion judge’s decision as long as it contained no errors of principle or palpable and overriding errors of fact.
In its decision, the panel rejected EPRF’s claim that the open building permit did not justify the buyer’s termination of the APS because it did not go to the root of title.
In addition, the appeal court judges concluded that the motion judge was within her rights to consider the buyer’s subjective concerns about the potential risks associated with the open work permit.
“She was entitled to infer that litigation was a real possibility on the evidence before her, notably EPRF’s failure to obtain the removal of the open permit weeks after it had raised the issue with the City,” the decision reads.
The lessons
Terminating an APS is not a step to be taken lightly, but it could be an option for buyers with justified doubts over a seller’s ability to convey good and marketable title.
This case also demonstrates the importance and value of carrying out your own title searches. For me, the biggest red flag was that the open work permit remained active even after the vendor claimed it had been removed.
As the appeal court panel pointed out, an open work permit is no trifling matter for a purchaser of commercial property. As well as serving as a barrier to title insurance, an open work permit could also interfere with a buyer’s plan to sell or lease the property in the future or pose a threat of litigation. Still, buyers should remember that not