When a prospective buyer defaults on deposit payments, the seller has the option to provide some leniency and perhaps amend the terms of the Agreement of Purchase and Sale. But what happens when the buyer defaults both on the deposit and on commercial rent? When commercial real estate and lease agreements collide, it can be difficult to know which rights will be prioritized over others. This was the central issue in the case of 6844987 Canada Inc. v. The United People of Canada before the Ontario Superior Court of Justice.

Applicants sought to sell commercial property at the height of the pandemic

In 6844987 Canada Inc. v. The United People of Canada, the applicants owned a church in Ottawa, its former rectory next door, and the attached garage. The applicants also owned the land upon which the buildings were erected, including a small parking lot.

In 2007, a corporation (also an applicant in the proceedings) purchased the church and the rectory. The church was renamed and eventually reused as a centre for the arts. One of the applicants maintained an office in the rectory.

As a result of the COVID-19 pandemic, operations at the former church were suspended in March 2020. The property could not make enough revenue to cover its monthly expenses, although tenants inhabiting the buildings continued to pay rent. The applicants thus decided, in June 2021, to list the property for sale for $5,950,000.

Applicants agreed to lease parts of property to the respondents before sale was complete

In June 2022, the applicants provided a written offer to sell the property to The United People of Canada, the respondent. The offer was for sale on an “as is” basis. The offer also included a schedule for payment of $305,000 to accept the purchase of the property. It was to close no later than December 6, 2022. The conditions of the offer required The United People of Canada to “obtain financing, [inspect] the Property, and [obtain] an inspection report.” The United People of Canada also had to waive all conditions within 120 days of acceptance of the offer, or else the Agreement would be null and void. In that event, the applicants would return the deposits.

The proposed Agreement allowed The United People of Canada to occupy the parts of the property that had not already been leased to tenants before the sale was complete. The proposed lease provided the following:

LEASE TO BUYER

Provided the Buyer is not in default of this Agreement of Purchase and Sale, the Seller agrees to rent the current unleased space to the Buyer on a month to month basis, commencing on the date this Offer is executed, at a rate of $5,000 per month plus HST (gross) payable in equal monthly installments with the first payment due prior to occupancy by the Buyer. The unleased space includes, but is not limited to:

1.)   The entire church building including restaurant and venue space;

2.)   The outdoor grounds;

3.)   The basement of The Rectory Art House;

4.)   The garage of The Rectory Art House;

5.)   The parking lot (with the right of existing tenants to continue to park if this is included in their lease agreement).

The Seller shall prepare the lease and shall include a requirement for a minimum $5,000,000 liability insurance with the Seller named as an additional insured.

The aforementioned lease shall be terminated immediately on the earlier of: a)  30 days following notice of material default by the Buyer; b) 30 days following written notice of termination from the Buyer; and c) the Completion Date.

Respondent failed to pay its deposits and rent

The United People of Canada accepted the offer and provided a bank draft for the first payment installment of $5,000. Although it had not yet paid rent or provided proof of insurance, a representative of The United People of Canada was given the keys to the former church and rectory and full access to the garage.

By the end of June, The United People of Canada requested to amend the Agreement to adjust the payment schedule to allow more time to raise funds. It then failed to pay its first installment of rent, despite being reminded by the applicants to do so on many occasions. The respondent asked for a further extension to the payment schedule, to which the applicants agreed. The respondent asked for a third extension, but it received no response.

By August 2022, the respondent was notified that it was in default of the Agreement. The email notifying the respondent advised that “this deal is now rendered dead and no longer binding on either party,” that the $5,000 deposit was to be returned, and that “the agreement is now null and void, you will have to vacate the church.” The lease was terminated on August 17, 2022, and the respondent had to vacate the property immediately. The bailiff was able to change the locks on the rectory and garage but was blocked from accessing the former church by supporters of The United People of Canada. The respondent also blocked existing tenants from using the parking lot “because of its dispute with their landlord.”

Agreement contained all terms of the commercial lease that were to be followed

At the hearing, there was a dispute over the terms of the lease. While the applicants maintained that the lease was contained in the Agreement, the respondent contended that the lease was an oral agreement.

The Court quickly sided with the applicants, as Schedule A to the Agreement contained “all essential terms of a lease.” This was signed by all applicants and by a representative of the respondent. Additionally, the Agreement also contained a “whole agreement” clause, which essentially states that it represents the entire agreement between the parties to the exclusion of any other document or oral communication. As a result, it was found that the respondent should have paid rent in accordance with the Agreement.

Failure to pay amounts owed was material breach of agreement

The Court found that the applicants had rightly terminated the lease, even though the Agreement did not explicitly state that a failure by the Buyer to pay deposits constitutes a material breach. The Court found that termination under those terms was implied “given the negotiated schedule of payment and the ‘time is of the essence’ clauses in the Agreement.”

While it is true that a failure to pay a deposit is not always justification for a seller to deem a sale null and void, there are five factors that, when met, allow a seller to do so. They are:

1. The ratio of the deposit to the obligation as a whole;
2. The seriousness of the breach to the innocent party;
3. The likelihood of repetition of the breach;
4. The seriousness of the consequences of the breach; and
5. The relationship of the part of the obligation performed to the whole obligation.

Commercial landlords can re-enter premises for non-payment of rent

In light of these factors, the Court found that the respondent’s failure to pay the deposits was a material breach that entitled the applicants to terminate the Agreement. There were serious questions about the respondent’s ability to pay this installment and future ones due to the repeated extension requests and inability to pay the even smaller rent. Moreover, the applicants were entitled to re-enter the premises as, under the Commercial Tenancies Act, commercial landlords can do so for non-payment of rent. The application was therefore granted.

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