Contracts, once properly executed, are binding on all parties. However, there are some circumstances in which a contract will be deemed to be unenforceable, either due to an issue with the contract itself, the circumstances of the execution, or events that may arise after the contract is created. Frustration of contract applies in the latter scenario. After a contract has been executed by the parties, it is possible that intervening events may occur that make the contract impossible to carry out as intended, or fundamentally change the circumstances intended when the contract was created.
In the case of real property, an Agreement of Purchase and Sale is generally binding on the parties once it is executed, subject to any conditions such as obtaining financing or a satisfactory inspection. In the current market where the competition for a home can be fierce, many people make offers without conditions in the hopes that theirs will be the winning bid. Without any conditions, the agreement is binding on the parties once the sellers accept the offer. Should either party later have a change of heart for one reason or another, the circumstances in which a court would find in favour of the party seeking to terminate the contract would be narrow. In a recent case, a buyer seeking to terminate an Agreement of Purchase and Sale claimed that the implementation of Ontario’s Non-Resident Speculation Tax (NRST) ultimately amounted to a frustration of the contract due to the hardships it placed on obtaining financing for the home.
The Non-Resident Speculation Tax: The Basics
The NRST, which came into effect on April 21, 2017, applies to the purchase or acquisition of real property located in the Greater Golden Horseshoe Region of Ontario by foreign corporations or by individuals who are not citizens or permanent residents of Canada. The tax only applies to land containing between one and six single-family residences. Therefore the tax does not apply to agricultural property, commercial property, apartment buildings with more than six units or industrial property.
The tax applies to 100% of the purchase price paid for a property, even if there are multiple purchasers and only one is a non-resident or a foreign entity. Each transferee is equally liable for the payment of the tax.
Non-Resident Speculation Tax Results in Housing Price Drop
In a case that has been in litigation since 2017, the Ontario Court of Appeal (ONCA) recently confirmed that the implementation of the NRST and the subsequent fallout was not sufficient to cause the frustration of an existing contract between a purchaser and a seller.
In the case at hand, the sellers (the Respondents on appeal) listed their home for sale in March of 2017, and the purchaser (the Appellant) made an unconditional offer to purchase the home for $1,871,000. The purchase was set to close in July of 2017. In the time between the creation of the Agreement of Purchase and Sale and the closing, the Ontario government announced a new tax on purchases of real property in the province by foreign nationals or foreign entities.
On closing day, several months after the announcement of the new tax, the Appellant informed the Respondents that she was unable to close. She claimed that due to the implementation of the new tax, housing prices in the area had dropped 20-30 percent, and as a result, she was unable to obtain financing. She had also not been successful in selling her own home.
The Respondents put their home back on the market and sold it for $619,000 less than the Appellant had contracted to pay. The Respondents brought an action against the Appellant for the difference in the purchase price as well as the carrying costs of the home from the original closing date until they closed the new deal.
The motions judge favoured the Respondents and awarded them the damages they sought. The Appellant appealed.
The Tax Did Not Change the Buyer’s Obligations
The ONCA agreed with the motion judge’s reasoning, stating:
Frustration applies to contracts including real estate transactions, when a supervening event alters the nature of the appellant’s obligation to contract with the respondent to such an extent that to compel performance despite the new and changed circumstances would be to order the appellant to do something radically different from what the parties agree to under their contract.
Given that the appellant had specifically chosen not to include any conditions in the Agreement of Purchase & Sale for financing or the sale of her home, she was not in a position to rely on either of those factors in order to claim frustration of contract. The intervening factor of the announcement of the new tax was also not tantamount to a frustration of the contract, despite the subsequent dip in the housing market, as these circumstances did not require the Appellant to do anything radically different than what was contemplated in the Agreement.
The takeaway for Purchases & Sellers
When entering into an Agreement of Purchase & Sale, it is crucial to ensure that the parties put their minds to possible factors that might impact their ability to close the transaction. When it comes to financing, obtain pre-approval or include a condition in the offer to purchase that the deal depends on approval. Eliminating conditions in order to facilitate a deal may seem like a good idea in the short term, only to become a major problem down the road. As always, it is best to review an Agreement of Purchase and Sale with an experienced real estate lawyer before making or accepting an offer.
The real estate lawyers at GLG LLP in Toronto assist clients with a full range of residential real estate services, including purchases and sales, financing and even litigation if necessary. The firm offers exceptional client service as well as a Bay St. experience with more reasonable rates. Call 416-272-7557 or complete the online form to arrange a consultation.