Sellers who terminated real estate deal can’t rely on ‘time is of the essence’ clause: court

Ruling opens door for parties to use more common sense in closing agreements, says lawyer

Sellers who terminated real estate deal can’t rely on ‘time is of the essence’ clause: court
James Cook and Anthony Di Battista

The Ontario Court of Appeal has demonstrated there are consequences for a seller who attempts to exploit a short delay in closing to exit a real estate transaction, says James Cook, partner at Gardiner Roberts.

The litigation arose when the bank failed to deliver funds for the purchase before 5 pm on the closing date. The seller faxed the buyer at 5:11 pm, terminating the agreement. The Court of Appeal confirmed the trial judge’s ruling that the seller acted unreasonably and in bad faith, and the agreement did not specify a 5 pm deadline.

The case “does a good job of showing the circumstances when a seller is obligated to complete a transaction and shows the consequences of a seller trying to pounce on what amounted here to a very short delay – even under their own theory of the timing – to terminate a transaction,” says Cook, a civil litigator who does commercial, real estate, and professional liability work. He was not involved in the case.

Anthony Di Battista, counsel for the purchasers, says he was pleased to see the appeal court suggest that it is open to the trial judge to make findings on the efforts of real estate counsel to cure minor delays in closing.

“I think it opens the door just a little bit for parties to use more common sense in closing agreements rather than trying to rely on strict principles.”

The case, More v. 1362279 Ontario Ltd. (Seiko Homes), 2023 ONCA 527, dealt with a deal to purchase three townhomes in Windsor, Ont. The appellant, Seiko Homes, built the homes and entered into purchase and sale agreements with the respondent, Sewa More, with a closing date scheduled for Oct. 1, 2020.

But the transactions failed to close that day. Two days prior, the respondents were unable to complete the new home warranty inspection, and the appellant did not deliver the respondent’s copy of the deficiency list. The appellants had also not severed the properties – the authorized separation of a piece of land to form a new parcel or plot – which the proper property registration required. While the respondents asked for an extension of the closing date, the appellant refused.

Justice Steve Coroza, who wrote the reasons for the Court of Appeal, said that the respondents began questioning whether the appellant was trying to force them to walk away from the deal amid rising real estate prices.

The mortgage lender National Bank delivered funding for the purchase later than expected. The bank blamed the delay on COVID protocols, staff shortages, reduced hours, and an end-of-month surge in transaction volume.

Having not received the money by 5 pm, at 5:11, counsel for the appellants faxed a letter to the respondent’s lawyer terminating the agreements and accusing the respondents of being unable or unwilling to close. In the following days, the appellant refused to close the transaction, tried to return the mortgage funds, and kept the deposit totalling $15,000.

The agreements had not specified a closing time but had included a “time is of the essence” clause. The parties had also signed a document registration agreement that provided that if a precise closing time and release deadline were not specified in the agreement, the release deadline would be 6 pm on the closing date.

Both brought motions for summary judgment. The respondents sought specific performance of the three agreements, and the appellant requested dismissal of the action and forfeiture of the deposits. The motion judge found no genuine issues for trial and that while the respondents were ready and willing to close, the appellant was not and “acted unreasonably” by “prematurely terminating” the transaction.

On appeal, Seiko Homes argued that the motion judge erred in finding it was “in anticipatory breach” of the agreements to fax the termination letter shortly after 5 pm because the proper closing time was midnight. The “time is of the essence” clause gave the deal a strict closing timeline, and the respondents “repudiated the agreement by failing to deliver the closing funds on the closing day,” said the appellant.

Seiko Homes also argued that Teraview, the Ontario Government’s land records database, does not permit electronic transfers past 5 pm.

The court discussed how, during the COVID-19 pandemic, it was common for lawyers to work together to put the finishing touches on a deal after Teraview closed for the day, says Cook. “Everybody was dealing with delays.”

The Court of Appeal held that the appellant’s position on a strict 5 pm deadline was contradicted by the document registration agreement, which provided a 6 pm deadline for releasing escrow funds. The court said there was no error in the motion judge’s finding that the appellant could not rely on the “time is of the essence” clause because no specific time was indicated in the agreement. There was also no error in the conclusion that the appellant had acted unreasonably in bad faith, found the court.

“For real estate solicitors… if you want to make sure that you can register the deed the same day, you would have to specify, not just the closing dates, but also a closing time and make it prior to 5 pm, which is the closing time for the registry system,” says Colin Stevenson, who acted for Seiko Homes.

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