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An important lesson for buying real estate assets

A recent decision from British Columbia’s highest court highlights the importance of heeding the...

A recent decision from British Columbia’s highest court highlights the importance of heeding the wording of a sale agreement and retaining a lawyer who can handle the job, especially when it comes to buying regulated real estate.

In Sutter Hill Management Corporation v. Mpire Capital Corporation, the purchase and sale of a specialized property went sideways after the buyer’s lawyer determined he lacked the expertise to complete a regulatory aspect of the transaction. The resulting delay frustrated the sale and the buyer, in turn, ended up losing a substantial deposit.

The purchase-and-sale agreement

In January 2016, Mpire Capital Corporation (the buyer) entered into an agreement of purchase and sale (the APS) to buy a care home from Sutter Hill Management Corporation and Sweet Investments Ltd. (the sellers) for $14,125,000. After the APS was executed, the buyer paid a $300,000 deposit toward the purchase price.

The APS was amended in July 2017 to include a term stating the buyer was required to “use commercially reasonable best efforts” to acquire all of the necessary licenses and approvals from the Fraser Health Authority (the FHA) “as soon as possible”. The closing date for the transaction was deemed to be 30 days after the date on which the buyer obtained regulatory approvals and the transfer of licenses from the FHA.

After the amendment was executed, the buyer took steps to obtain regulatory approvals in the following months. On Nov. 8, 2017, the FHA sent the buyer a number of draft agreements which had to be executed as part of the approval process.

A few weeks later, the buyer’s lawyer advised the sellers he lacked the expertise to advise the buyer on the FHA agreements and he withdrew on Nov. 20, 2017. The buyer retained a different lawyer on Nov. 24, 2017.

On Nov. 27, 2017, the sellers delivered a notice of default to the buyer, which stated the buyer breached the APS for failing to use its “best efforts” to obtain FHA approval, as agreed. The notice of default stated the buyer had taken too long to return the agreements to the FHA and a deadline of Dec. 12, 2017 was given to cure the default.

By Dec. 14, 2017, the buyer had not yet returned the agreements to the FHA. The sellers therefore stated the APS was at an end and took the position that the buyer’s deposit was forfeited as a result.

The sellers then commenced a court application seeking to retain the deposit.

Court decision overturned on appeal

The application judge at the British Columbia Supreme Court did not agree with the sellers.

The judge reasoned that, since the buyer retained a new lawyer on Nov. 24, 2017 to review the FHA agreements, there “simply was not sufficient time” for the new lawyer “to immediately engage in the process”. It was therefore held to be “commercially reasonable” for the buyer to wait for its new lawyer to give advice on the agreements and the buyer was not held to be responsible for the resulting delay.

The sellers appealed the decision and argued the application judge was wrong in holding that the buyer had in fact made “commercially reasonable best efforts” to get FHA approval in a timely manner. The British Columbia Court of Appeal agreed with the sellers in this regard.

The court held that, in order to determine what was meant by the words “commercially reasonable best efforts” and “as soon as possible”, the agreement as a whole and the surrounding circumstances had to be considered. It was noted the lower court made the mistake of examining this issue in too narrow of a context.

The appellate court stated that, in agreeing to obtain FHA approval “as soon as possible”, and using “commercially reasonable best efforts” to do so, the buyer was obligated to “do everything it reasonably could to obtain the necessary approvals as soon as possible, excepting only steps as would be commercially unreasonable”.

As such, it was noted the amount of time it took for the FHA to grant approval was not relevant, as it could not take any steps until the agreements were returned to it. By not returning the FHA agreements in a timely manner, the buyer was the one who was responsible for delaying the process, as it could not explain why it had not taken any concrete steps between the time the agreements were received and the delivery of the notice of default.

It was also held the buyer’s need to retain another lawyer did not excuse it from completing the transaction in a timely manner.

The decision of the application judge was therefore reversed and the deposit was ordered to be paid over to the sellers in full.

The implications for buyers and sellers

Both buyers and sellers would be wise to pay close attention to this decision and its potential implications.

Phrases like “commercially reasonable best efforts” don’t have a clear meaning and will always come down to the specific context of the transaction. However, when entering into an agreement with that (or similar) wording, buyers should always be able to prove they are moving as quickly as they can to complete the transaction and they should also be able to explain any delays.

Also, perhaps more importantly, it is essential for buyers to retain a lawyer with the necessary expertise for complicated real estate deals. This especially holds true in matters like this case, which involve the purchase of specialized assets and related regulatory hurdles.

If a lawyer finds themselves out of their depth, it could end up compromising the deal.

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