Specific performance is an equitable remedy in the law of contract. Its effect is to require the party against whom the order is made to perform a specific act, such as the performance of an obligation in the contract in question.
Specific performance is most often seen used in real estate transactions forcing the deal to close. This is because land is considered a unique asset making damages less appropriate. At common law, the remedy for a breach of contract was damages. Equity developed the alternate remedy of specific performance where damages appeared an inadequate remedy. As with all equitable remedies, specific performance is a discretionary remedy and is therefore dependent on the facts of the case.
A Recent Case
The Ontario Court of Appeal (ONCA) was recently asked to deal with the remedy of specific performance dealing with an option to re-purchase commercial real estate in Di Millo v. 2099232 Ontario Inc.
The appeal was from the dismissal of an Application seeking to have the Respondent re-convey commercial property back to the original vendor based on the non-performance of a condition subsequent in the Agreement of Purchase and Sale.
The applications judge had dismissed the application finding that the requirements of the triggering option had not been met. This was a finding that the option was exercised too late and was not in keeping with the “time is of the essence” clause in the Agreement. He further found that the Applicant had not shown he was ready, willing and able to close by having failed to tender his performance.
For clarity, the Applicant/Appellant will be referred to as the Vendor and the opposite party the Purchaser.
In 2012, the Vendor sold to the Purchaser two industrial lots for $1,160,000. The deposit paid in cash was $360,000 and the balance paid was by way of a take-back mortgage for $800,000. The Agreement contained an option to repurchase the property if certain building conditions were not met as follows:
Covenant to Build and Option to Purchase – The Purchaser covenants and agrees with the Vendor that within thirty (30) months from the Closing Date it shall complete construction upon the Real Property of an industrial building to the extent that the roof, heating, plumbing, concrete flooring, exterior, paving and landscaping is completed as certified by the Vendor’s consulting engineer or architect. The Purchaser agrees that if the Purchaser shall fail to complete construction, as aforesaid, within the aforesaid thirty (30) month period, the Vendor shall have the option to repurchase the Real Property at the sale price paid by the Purchaser to the Vendor, pursuant to Section 2.01 hereof, after deducting therefrom any agents’ commissions paid or incurred by the Vendor in connection with the sale of the Real Property to the [Purchaser] and upon payment by the Vendor of the balance of the Purchase price due upon such repurchase of the Real Property, the Purchaser, its successors and assigns, will release and re-convey to the Vendor all its right, title and interest in and to the Real Property. Such agreement arising from the exercise of this option by the Vendor shall be completed thirty (30) days after the date of notification to the Purchaser of the exercise of such option. A provision to this effect may be inserted in the conveyance of the Real Property [from] the Vendor, its successors or assigns, if applicable, and the Purchaser shall, and agrees to, execute all instruments or documents to give effect to the provisions of this paragraph.
The Agreement was silent as to when the option could or had to be exercised. It also required the Purchaser to not sell, assign or transfer its interest in the property without the prior written consent of the Purchaser.
Despite these obligations, the Purchaser did not comply with the construction deadline, had placed two additional mortgages on the property, and entered into an agreement to sell it to a third party all without the Vendors consent. The Vendor gave notice of his intention to exercise the option on September 24th, 2016. This would have made the closing date to be October 24th, 2016. The Purchaser refused and the Vendor brought his Application seeking only specific performance with a credit for the encumbrances. He did so as he had purchased the larger of the two mortgages.
Issues on Appeal
- Did the application judge misapprehend the facts and the nature of the application?
- Did the application judge err in finding the option had expired?
- Is the appellant’s claim for specific performance defeated by his failure to tender?
- Is the appellant entitled to the remedy of specific performance?
The trial judge did misapprehend the nature of the Application. It was not as he stated a request for a mandatory injunction to remove the two mortgages. He further was mistaken in finding that there was no evidence before him of the purchase of the mortgage by the Vendor. These errors infected his analysis.
Had the Option Expired?
The Application judge erred in concluding that the option had expired based on the “time is of the essence” clause. Such clauses become operative for only time periods specified in the contract. The time limit then becomes essential such that its breach will permit the innocent party to terminate the contract. The clause does not impose a time limit in itself but rather determines the consequences of a failure to comply. Here there was no time limit for exercising the option. In such cases, the law imposes a reasonable time limit by implication. Here the giving of notice within six months was reasonable since the Purchaser had never suggested that it had expired and never demonstrated an interest in timely compliance with the terms of the agreement itself. It had not even started construction and had twice sought extensions of the deadline.
Failure to Tender
A party seeking specific performance must show that they are ready, willing and able to close the transaction. While tender is the best evidence of that state it is not required for an innocent party to enforce their contractual rights when the other party has clearly repudiated the agreement or made it clear they have no intention to close the deal. Repudiation may be express or implied. Here the renunciation was clear when the Purchasers lawyer responded to the request to close with an invitation to litigate instead. The Vendor did not, therefore, need to tender but did still need to show that he was ready, willing and able to close. He did so by his affidavit filed at the Application and his evidence in cross-examination.
Entitlement to Specific Performance
This involves a determination of whether the remedy is the appropriate one on the facts. The analysis of this issue follows the decision of the Supreme Court of Canada (SCC) in Semelhagovv. Paramadevan. There it was held that the remedy of specific performance should not be granted absent evidence that the property in question is unique meaning that its substitute would not readily be available. Damages should not be assumed to be an inadequate remedy for breach of contract in real estate transactions.
What then is required to show that the real property in issue is unique was stated by the ONCA in John E. Dodge Holdings v. 805062 Ltd. as follows:
I agree that in order to establish that a property is unique the person seeking the remedy of specific performance must show that the property in question has a quality that cannot be readily duplicated elsewhere. This quality should relate to the proposed use of the property and be a quality that makes it particularly suitable for the purpose for which it was intended.
Whether a substitute is readily available depends on the facts of each case. Here, the parties did not address the issue but the record was felt sufficient by the Court for it to do so. The ONCA thus found that the Vendor’s overall plan was the development of the subject property and other contiguous property kept by him as part of an overall subdivision plan. The option was to ensure the implementation of the plan. When the Purchaser did not build as promised the plan could not proceed. Therefore specific performance was the appropriate remedy.
At Milosevic Fiske LLP, our team of Toronto corporate commercial lawyers regularly represent clients in complex commercial litigation matters including commercial real estate disputes. If you are involved in litigation resulting from a commercial real estate transaction or a related matter such as a breach of contract, an alleged fraud, or other issue, we can help. Over the years, our team of exceptional litigators has seen it all and has successfully fought for our clients’ rights. Our impressive track record speaks for itself. Call us at 416-916-1387 or contact us online for a consultation.