TIME IS MONEY

July 06, 2017

Provisions dictating that ‘time is of the essence’ often seem innocuous, but these terms can have significant negative consequences for commercial and residential buyers – particularly developers – if breached
 
Agreements of Purchase and Sale typically include a provision that ‘time is of the essence’ [TIOTE]. The purpose of a TIOTE provision is to make clear that time-related obligations in the agreement, such as the payment of a deposit, the tender of closing funds or the delivery of a waiver, will be strictly enforced. The  TIOTE provision warns buyers that the late fulfilment of a time-related obligation, no  matter  how short the delay, constitutes a material  breach  the  seller  could  use  to  terminate the contract. For example, if an agreement stipulates that the closing date is scheduled for July 5, 2017 at 5 p.m., and the buyer tenders funds at 5:05 p.m., the seller has the right to terminate the agreement and refuse to accept the late funds.
            This particular outcome may seem somewhat outlandish it may be argued that the seller suffered no damages as a result of a five- minute delay, while the buyer’s damages of losing the property would be significant. But how late is too late? If not five minutes, what about a day? If not a day, what about a week? A month? A year?

LEGAL PRECEDENT

Sellers are often purchasing a new property at the same time as they move on from their old one; they rely on closing funds to finance the subsequent purchase. A delay in receiving funds from the sale would force the seller to breach their obligations under the second agreement and may cause a domino effect of breaches if the seller’s seller is also buying. Even if there are no subsequent transactions at stake, and even if the seller would suffer no harm by granting the extension, the seller still has the right to terminate the contract in response to late delivery of funds.
            The recent case of 2336574 Ontario Inc. v. 1559586 Ontario Inc. confirms that the court has no equitable jurisdiction to intervene to save a late buyer from the termination of contract and forfeiture of deposit. In this particular case, the buyer missed the closing date by a day, and that was enough to put an end to the contract.             From a macro perspective, a contract must be enforced, even when the outcome is unfortunate. The vast majority of real estate transactions in Ontario rely on the standard Agreement of Purchase and Sale from the Ontario Real Estate Association [OREA]. If courts interfered with the interpretation of the OREA standard form agreement, it would undermine the sanctity of contract and result in uncertainty and mistrust in all contractual relationships.
            A seller does not need to have a virtuous reason for refusing to grant a short extension, even when funds are subsequently available. When the parties are commercially experienced buyers and sellers in a discrete, one-off transaction, the  duty of good faith imposed by the contractual relationship means sticking to the letter of the contract and not deviating – in other words, 5 p.m. means 5 p.m.

WHY TIME OF THE ESSENCE MATTERS

            Sellers are generally willing to excuse minor delays in order to achieve the collective goal of selling/buying the property. However, two recent trends have created a misalignment in the market and prompted renewed attention on the oft-forgotten TIOTE provision. First, developer buyers are commonly investing tens of thousands of dollars into a property prior to the closing date. In order to limit carrying costs and the time it takes to break ground, developer buyers are obtaining architectural drawings, building permits, zoning variations and committee of adjustment approvals all in advance of closing.
            Second, Toronto and Vancouver’s scorching-hot real estate markets have seen housing prices increase substantially over a matter of months. When an agreement is subject to a delayed closing, the increased value of the property may cause a seller to have seller’s remorse and seize an opportunity to get out of the deal.
            The key takeaway is that late delivery of funds may cause a buyer to lose his awaited property and his deposit – and potentially make him liable to the seller for damages resulting from the breach of contract. Buyers should be cognizant of this when choosing their lender, or should secure a backup short-term financing plan in case of delays with financing. There are certain mortgagees that are notorious for having confusing forms, unusual lending requirements and slow response times.
            The importance of reading forms in their entirety cannot be stressed enough. This may seem simple, but it is amazing how often buyers rely on their mortgage broker or lawyer to vet documents, when ultimately the onus is on the buyer to enter information properly. There are several bureaucratic layers that can prevent errors from being rectified quickly, especially when working with a B lender or going through a broker. Checking mortgage documents twice is always preferable to scrambling for funds at the eleventh hour, or worse, missing the closing date.

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