19 December 2019By Brendan Monahan
The Ontario Court of Appeal recently considered the doctrine of frustration in the context of a real estate transaction in Perkins v. Sheikhtavi, 2019 ONCA 925 (“Perkins”). In this case, the Court upheld the motion judge’s finding that the Ontario government’s announcement of a new tax on non-resident home buyers did not “frustrate” the relevant agreement between the parties. The Court therefore upheld the motion judge’s award of damages against the appellant resulting from the failure to close the purchase of a home.
Background: The respondents had listed their home for sale in March 2017. On April 3, 2017, the appellant made an unconditional offer to purchase the home for $1,871,000. The respondents accepted the offer and the closing was scheduled to take place in July 2017.
After the offer was accepted but prior to closing, the Ontario government introduced the Non-Resident Speculation Tax (“NRST”), which levies a 15 per cent tax on non-resident purchasers of designated residential real estate in certain parts of Ontario. On the day of closing, the appellant advised that she could not close, as she had been unable to sell her own home and obtain mortgage financing due to the significant drop in home values as a result of the NRST.
The respondent put the property back on the market and it sold for $1,251,888. The respondent commenced legal proceedings against the appellant seeking, among other things, damages of $619,112, being the difference between the amount the appellant had offered and the amount the property later sold for. The respondent moved for summary judgment.
The summary judgment motion: on the motion, the appellant argued that the agreement had been “frustrated” by the Ontario government’s announcement of the NRST. The evidence of two real estate agents, who swore affidavits at the request of the appellant, was that within days of the announcement, real estate prices in the area dropped 20 to 30 percent. The appellant argued that as a result, she had been unable to sell her own home and obtain sufficient mortgage financing to close the sale.
The motion judge rejected the appellant’s arguments, finding that the government’s announcement did not “force the [appellant] ‘to do something radically different from what the parties agreed’”. His Honour therefore granted summary judgment in favour of the respondent and ordered the appellant to pay $619,112 and carrying costs in the amount of $4,621.05. The appellant appealed to the Court of Appeal.
The Court of Appeal dismissed the appeal: on appeal, the Court of Appeal found that the doctrine of frustration applies when a “supervening event” alters the nature of the parties’ obligations 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 agreed to under their contract”.1
The Court was not persuaded that the government announcement of the NRST qualified as a supervening event that frustrated the contract. The Court observed that the appellant had chosen to make her offer unconditional, which was a risk she was willing to take in order to induce the respondent to accept her offer (the evidence was that there were 13 offers to purchase the home, and that the appellant was told by her real estate agent that her offer would not be accepted unless the offer was unconditional, because she was not the highest bidder). The Court put it this way:2
In this case, the appellant deliberately chose not to include a condition that she had to be able to sell her home and obtain mortgage financing before closing as a term of her offer to purchase.
She would reasonably have known that there was a risk her home would not sell at the price she sought but made an unconditional offer to purchase the respondents’ home because she wanted her offer to be accepted (although she was not the highest bidder) …
The appellant’s contract was not frustrated; it was breached by the appellant.
In the result, the Court upheld the motion judge’s decision and dismissed the appeal with costs.
The Takeaway: the Court’s analysis in Perkins suggests that a “supervening event” (in this case, the announcement of the NRST) will not, itself, be sufficient to frustrate the performance of a contract. The evidence in this case suggests that the announcement of the NRST did affect the appellant’s ability to close the transaction (by making it more difficult to sell her own home). However, because the appellant’s offer was not subject to any conditions, the announcement of the NRST (however unexpected it may have been) did not force the appellant to do something different than what she agreed to.
The appellant could have made her offer subject to a mortgage financing condition, which would have protected her in the event she was not able to obtain such financing. She bargained away that protection to make her offer more attractive to the respondent. In upholding the motion judge’s decision, the Court in Perkins reinforces the notion that parties will be held to their bargains.
1Perkins at para 15.
2Perkins at paras. 18-19, 21.