Canada: Is Time Really Of The Essence?

Last Updated: June 7 2019
Article by Stefan Pahulje

The Use of "Time is of the Essence" Clauses in Commercial Real Estate Repurchase Options

The ONCA provided some guidance and analysis on both “time is of the essence” clauses as well as the availability of specific performance when it comes to a commercial real estate repurchase options.

Facts

The appellant, Di Millo, sold two lots to the respondent, 2099232 Ontario Inc., in 2012 for a purchase price of $1,160,000. The respondent paid $360,000 in cash and the appellant took back a mortgage of $800,000. The agreement of purchase and sale included an option clause providing that the respondent was to build a specified industrial building within 30 months of closing, failing which the appellant would have the option to repurchase the land at the original purchase price, less the real estate commission on the original sale. The agreement of purchase and sale also included a clause where the respondent agreed not to sell, assign or transfer its interest in the agreement without the prior written consent of the appellant.

The respondent had not taken any steps to build on the property after the 30 months had elapsed. A one year extension was granted by the appellant but the building still had not been started after the extension. Six months after the extension, the appellant’s lawyer wrote to the respondent’s lawyer exercising the option. The respondent requested yet another one year extension but that was refused. The appellant also learned that there were two new mortgages on title and requested that they be discharged prior to closing.

After learning that the mortgages placed on the property without his consent were legitimate mortgages, the appellant purchased one of the mortgages for approximately $500,000. The appellant claimed that he purchased the mortgage to provide evidence that he had the finds to close. Although the appellant had initially requested discharge of the two mortgages placed on the property by the respondent in his notice of application, by the time of the application to the court, the appellant simply requested specific performance of the repurchase option.

Trial Decision and Issues

The application judge dismissed the application and found that the timing of the notice to exercise the option was outside the reasonable notice period contemplated by the agreement and it did not comply with the “time is of the essence” clause. The application judge also found that the appellant was not “ready, willing and able” to close and that his failure to tender was fatal to his claim for specific performance.

The ONCA was tasked with determining whether the repurchase option had expired in light of the “time is of the essence clause.” The ONCA also examined whether the appellant was entitled to the remedy of specific performance.

Decision

The Ontario Court of Appeal (“ONCA”) allowed the appeal and addressed the meaning of the “time is of the essence” clause. The ONCA also found that the appellant was entitled to specific performance.

 “Time is of the Essence” Clause

A “time is of the essence” clause is engaged where a time limit is stipulated in a contract. This clause signifies that a time limit in an agreement is essential and that a breach of the time limit will permit the innocent party to terminate the contract.  These clauses do not impose a time limit, but instead dictate the consequences of failing to comply with a time limit already specified in an agreement.

In this case, there was no specific time limit when it came to the appellant giving notice to exercise the repurchase option and, therefore, the “time is of the essence” clause did not apply. Because the “time is of the essence” clause did not apply, the ONCA looked at whether the notice to exercise the repayment option was exercised within a reasonable amount of time. The ONCA concluded that the notice to exercise the option was provided within a reasonable period of time.

Specific Performance

The ONCA found that the appellant’s claim for specific performance was not defeated by his failure to tender. While a tender is the best evidence that a party is ready, willing and able to close, a tender is not required from an innocent party enforcing its contractual rights when the other party has clearly repudiated the agreement or has made it clear that it has no intention of closing the deal. The ONCA found that the appellant was relieved of the obligation to tender because the conduct of the respondent clearly communicated a decision not to proceed with the transaction.

The ONCA stated that the remedy of specific performance is available in the context of repurchase options. Citing the Supreme Court of Canada (“SCC”) case of Semelhago v Paramadevan, the ONCA confirmed that the remedy of specific performance will only be granted upon evidence that a property is “unique” or if “its substitute would not be readily available.” Whether or not specific performance is available will depend on the facts of each particular case.

In this case, the ONCA found that the land was sufficiently unique to satisfy the specific performance test, stating that there could not be a substitute property in another location that would meet the goals of the subdivision plan. The ONCA also noted that the appellant provided the municipality with $400,000 as security to be released when the subdivision was fully developed. Specific performance was the only adequate remedy because the appellant could not complete the development of the subdivision due to the respondent’s failure to build on the property.

Concluding Remarks

The SCC recently dismissed 2099232 Ontario Inc.’s leave to appeal application on May 23, 2019. This decision from the ONCA can therefore be relied on as a persuasive authority when it comes to “time is of the essence” clauses and the availability of specific performance with respect to repurchase options.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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