A decision from the Ontario courts has affirmed two important principles:

1. Pre-construction assets shouldn’t be transferred without the builder’s consent; and

2. When buying and selling real estate assets, never lose sight of the obligation to act in good faith.

Last year, in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, the Supreme Court of Canada affirmed the obligation to act in good faith when it comes to performing contracts (please see my column on this issue).

Now, over a year later, the issue has again come up, where a buyer of a pre-construction property agreed to transfer the property to one set of buyers, and then substituted  a different buyer without consent. The Ontario Superior Court held that this was bad faith dealing and did not allow the assignment.

Chandran v. Pannu case

In Chandran et al v. Pannu et al., a buyer entered into an agreement of purchase and sale with a builder in October 2020 for the purchase of a pre-construction asset. The deal was set to close in September 2021.

The agreement explicitly stated that if the purchaser wanted to assign his interest in the agreement, the builder’s consent was required and an assignment fee was payable.

In March 2021, before the construction was complete, the purchaser assigned his interest in the agreement to two other joint purchasers without requesting the builder’s consent, as required.

The new purchasers accepted the assignment, executed an amended agreement of purchase and sale and paid a deposit to the original purchaser.

The construction of the property was stalled a number of times due to construction delays and other unforeseen issues caused by the COVID-19 pandemic. The closing date was extended to November 2021.

After the amended agreement of purchase and sale was executed, the value of the property increased considerably. By March 2022 it had nearly doubled from the original purchase amount.

Before the closing date, the joint purchasers requested confirmation on multiple occasions that the builder’s consent was obtained, as required. The original purchaser ignored the requests and later amended the original agreement of purchase and sale with the builder and substituted his realtor’s wife as the purchaser.

The joint purchasers’ consent was not obtained before the agreement was amended and assigned to the new buyer.

The transaction closed in December 2021 and the new buyer became the owner of the property.

The court action and decision

The joint purchasers commenced a court action against the original purchaser. They took the position that they were unfairly deprived of the opportunity to purchase the property and that the original purchaser breached a duty of good faith to them by not obtaining the builder’s consent.

In response, the original purchaser argued that, because the builder had not consented to the assignment of the agreement, he was free to sell the property to the other purchaser.

The court sided with the joint purchasers and held that the original purchaser breached the agreement by failing to obtain the builder’s consent. It was also held that the agreement was breached a second time when it was assigned to the new buyer.

Additionally, it was held that the new purchaser accepted the agreement knowing it was a breach of the deal which was made with the joint purchasers.

In the end, the new purchaser was ordered to transfer the property to the joint purchasers, in accordance with the assignment agreement.

This decision serves as a stark reminder that, when it comes to buying and selling real estate assets, courts will not tolerate parties acting in bad faith and trying to escape clear terms of the contract.

As this case demonstrates, this principle also applies to obtaining a builder’s consent when the agreement requires it.