In real estate transactions, the phrases “ready, willing and able to close” and “time is of the essence” are familiar to buyers and sellers alike. The rules and consequences have become more clear over the years when either the vendor or the purchaser fails to close.
But what happens when neither side honours the deal, or both parties fail to close on the appointed date?
A recent decision from British Columbia’s highest court has shed light on this issue.
The Double Default Rule
The British Columbia Court of Appeal in Lal v. Grewal has affirmed the longstanding principle known as the “Double Default Rule” or “The Rule in King v. Urban”. This rule addresses situations where both parties fail to fulfill their obligations on the closing date.
The rule is based on two key propositions.
- When time is of the essence and neither party is ready to close on the agreed date, the agreement remains in effect.
- Either party may reinstate the “time of the essence” clause by setting a new closing date with reasonable notice.
How the rule has been applied
In Lal v. Grewal, both the vendor and purchaser failed to show up at the appointed time with the required deliveries. The court held that this constituted a double default scenario.
Applying the Double Default Rule, the court determined the deal had not been terminated. Instead, the contract would continue in force until one party sets a new closing date and is prepared to complete the transaction.
Ontario courts have also embraced the Double Default Rule. In Tribute (Springwater) Limited v. Atif, the Ontario Court of Appeal affirmed that “when both contracting parties breach a contract, the contract remains alive with time no longer being of the essence”.
Also, in Fortress Carlyle Peter St. Inc. v. Ricki’s Construction and Painting Inc., the Ontario Court of Appeal dealt with a situation where an agreement of purchase and sale provided that closing would take place at 6 p.m. on a certain date, and that the vendor was required to provide the purchaser with tenant estoppel certificates at least five days before closing.
The vendor did not honour this term and its lawyer provided a deficient last estoppel certificate on the closing date. A revised version of the certificate without the deficiency was delivered to the purchaser in the final hour before closing.
The purchaser requested an extension of the closing date as a result of the late delivery. The vendor denied the request and claimed that it was ready, willing and able to close. The purchaser was not able to transfer the closing funds until about 20 minutes after the closing time and tried to close on the following day.
The vendor then claimed the purchaser breached the agreement and refused to complete the transaction on the basis the purchaser did not honour the time of the essence clause.
The purchaser brought an action to force the vendor to complete the transaction.
The judge found the vendor acted in bad faith by failing to deliver the estoppel certificate on time and then refusing to close and ruled in favour of the purchaser. The decision was upheld on appeal and held that, if a party is going to insist on time is of the essence, it has to show that it is “ready, desirous, prompt and eager” to carry out the terms of the agreement and could not have been the cause of the subject delay or default.
In that case, the vendor was not able to meet either of those conditions. By failing to deliver the certificate on time, the vendor could not claim it was eager to carry out the terms of the agreement. It also contributed to the delay that resulted in the purchaser being unable to deliver the funds on time.
The court therefore ordered the vendor had to complete the transaction.
However, since both sides technically defaulted by failing to close on time, the court addressed the Double Default Rule confirmed that “when both contracting parties breach a contract, the contract remains alive with time no longer of the essence”. In those circumstances, “either party may restore time of the essence by giving reasonable notice to the other party of a new date for performance”.
When the purchaser tried to close on the day after the closing date, the court held that amounted to reasonable notice of a new date for performance and it was entitled to close.
Key takeaways to keep in mind
The key lessons to learn from the Double Default Rule are as follows:
- The deal isn’t dead: If both parties default, the transaction isn’t automatically terminated. Either party can revive it by setting a new closing date with reasonable notice.
- Importance of tendering: While not always required, tendering serves as evidence of a party’s readiness to close and can be crucial in disputes.
- Good faith matters: Courts will scrutinize the parties’ conduct leading up to the closing date. If one party is going to insist the deal is dead, it should avoid actions that could delay or prevent the other party from closing.
- Be prepared: If you reinstate time of the essence with a new closing date, ensure you’re ready to close. If only one party is ready on the new date, the defaulting party may face damages or be forced to close.
The Double Default Rule serves as a reminder real estate transactions don’t always proceed as planned. But it also provides a mechanism for salvaging deals when both parties stumble at the finish line.
As always, clear communication and good faith dealing remain crucial in navigating these situations.