A variation of this article will appear in the February 26, 2010, issue of The Lawyers Weekly published by LexisNexis Canada Inc.
Typically, agreements dealing with real property are only binding if made in writing and executed by the parties. However, there are exceptions that BLG's clients should be aware of. The Ontario Court of Appeal's recent decision in Erie Sand and Gravel Limited v. Seres' Farms Limited et al upheld the binding nature of an unexecuted agreement due to the partial performance of the contract by the parties. This case offers an example of what constitutes part performance and how it can cause an oral agreement to be enforceable. It also highlights the importance of clear communication when negotiating agreements, particularly when a right of first refusal or offer is part of the deal.
The Facts
Erie approached the vendor (Seres' Farms) about purchasing land for the purposes of a mining business. Erie did so with the knowledge that a third party, Tri-B, had a right of first refusal on the property. Because of this right, Erie refused to provide a written offer until the terms of the agreement were finalized verbally. After a series of meetings, Erie submitted a written offer and a deposit for the full purchase price of $1,193,082. Seres said it would accept this offer if Tri-B did not match the offer with the "same deposit, terms and conditions" within five banking days. However, Seres did not sign the offer.
After receiving notice of Erie's offer, Tri-B opted to match it, with the notable exception that the closing date would be three weeks later, and that the deposit provided would be for $25,000, with the remainder of the purchase price to be paid on closing (in part by way of a vendor take-back mortgage). Nevertheless, Seres accepted this offer despite the difference in the terms and conditions with Erie's offer and the property was transferred to Tri-B.
The Outcome
Erie claimed that there was a binding agreement between Erie and Seres, conditional upon Tri-B refusing to match the offer. Erie's position was that since Tri-B failed to meet all the conditions of the offer, Seres was obligated to transfer the land to Erie. Tri-B argued that no legal contract existed between Erie and Seres, merely that they had an "agreement to agree". Two levels of Courts in Ontario agreed with Erie. Although there was not a signed contract, all of the essential terms were established and both parties intended for the agreement to be binding and, most importantly, Seres had shown "partial performance" of the agreement, taking Erie's offer to Tri-B.
Part Performance
To protect against fraud, the Statute of Frauds requires that any agreement to transfer land must be written and executed. An exception to this requirement is the doctrine of part performance, which applies because the risk of fraud in such circumstances is minimal.
In Erie, the Court stated that in assessing part performance it is not just a plaintiff's actions that are relevant, but also a defendant's actions. In this case, in addition to Erie preparing the offer and providing a deposit which Seres accepted, the steps taken by Seres in delivering the offer to Tri-B also contributed to the finding that there was part performance. The Court conceded that, generally, an offer to purchase land accompanied by a deposit would not constitute part performance. However, because of the intention by Seres to trigger the right of first refusal and the acceptance of a deposit for the full purchase price, a reasonable person could conclude that there was part performance in relation to some dealing with the land.
Six Practical Tips
Here are six practical tips for BLG's clients in light of the Erie decision:
- Although we can see from Erie that oral or unexecuted agreements may be found binding by a Court, parties who want agreements to be binding should ensure that agreements are in writing and executed. Before completing an agreement, review it carefully to ensure that there are no blanks that need to be filled in, notes to draft that remain in the document, or schedules that have not been properly completed. Typically, you do not need to review legal agreements unless a problem arises, so make sure that the document is in final form and executed before it is put into the filing cabinet. Also, given the ease of today's technology, pdf the document and send by email to your lawyer and anyone else with a vested interest in the agreement or lands.
- Usually, you do not want verbal communications to be binding until they are properly documented and executed by both parties. Decisions such as Erie suggest that verbal agreements can be binding in certain situations. Do not rely on the fact that nothing has been executed. Rather, verbal and written communications, such as emails, letters or correspondence between your lawyers or real estate agents, should specify that the communications are not binding on the parties until an agreement is finalized and executed by both parties. Court's will consider important clear communications which expressly stated that the agreement was non-binding in nature.
- This case serves as a reminder that partial performance of an oral agreement can render it a binding contract. Care must be taken to ensure that any actions performed during negotiations cannot be construed as partial performance of a binding agreement. Ideally, no obligations under an agreement should be performed until the contract is finalized and executed.
- Rights of first refusal or rights of first offer are some of the most technically detailed and difficult clauses to draft. Whether you are the party granting the right of first refusal or offer or the recipient of such a right, you need to carefully consider all of the potential issues, which might include determining a fair market price at the time of the future transaction, changes in value to the property based on improvements or deterioration over time; future Planning Act problems; the degree to which the matching offer must be precisely the same as the one being provided; and dealing with potential encumbrances against the property between the date that the option is granted and potentially exercised.
- You can see the difficult position that Seres' Farms was in when Tri-B stated that it could match the purchase price but made some further changes to the process for closing (namely, extending the closing date for a few weeks and providing a smaller deposit). At this point, Seres' Farms likely saw that it was in a tough position in dealing with two very motivated potential purchasers. Getting a lawyer involved to manage the process surrounding the right of first refusal including ensuring that appropriate notices and timing is dealt with is important so that future liability is minimized.
- Almost all real estate transactions involve timelines for certain obligations or conditions to be satisfied. In Erie, Tri-B had only five days to match the offer that was provided. Given the offer included a deposit equal to the entire purchase price, you can see how Tri-B's position was severely compromised. You need to negotiate time frames that will allow you time to deal with these types of unexpected scenarios, provided that you are not unreasonable in terms of timeline expectations. A significant portion of real estate litigation is based on timelines that ultimately could not be satisfied for a number of reasons!
Cases such as Erie give all of us pause for thought. Whenever you are negotiating an agreement dealing with real property, particularly where future rights or rights involving third parties are involved, it is definitely recommended to obtain legal advice in order to avoid liability in the future.
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.
