Condition Precedent and the Automatic Termination of a Contract, The Lawyer’s Daily (December 14, 2018)

(this article originally appeared in the Lawyer’s Daily on December 14, 2018)

By Nikolay Y. Chsherbinin

A true condition precedent occurs whenever the rights and obligations of the contracting parties depend on a future uncertain event, the happening of which is beyond the parties’ control and contingent entirely on the will of a third party. Until the event occurs, there is no right to specific performance on either side.

Determining whether a contract automatically terminates if a condition is not satisfied by its completion date largely rests on whether the condition was a true condition precedent. This was the task for the Court of Appeal for Ontario in THMR Development Inc. v. 1440254 Ontario Ltd. 2018 ONCA 954 (THMR Development ) where it resolved that a condition precedent was satisfied and ordered specific performance on the basis that there was no evidence of available substitutes, and, significantly, without regard as to whether the property was commercial or residential.

In THMR Development, THMR Development Inc. (THMR) sought to acquire a two-storey mixed commercial/residential plaza on one of the main streets of Port Perry, Ont. After a lengthy negotiation, THMR entered into a formal agreement of purchase and sale (the agreement) with 1440254 Ontario Ltd. (144) dated April 4, 2017. The agreement included a provision that made it a condition precedent for THMR to assume the mortgage registered on title by Alterna Savings and Credit Union Limited (Alterna). In accordance with this condition, THMR took appropriate steps and obtained Alterna’s approval to assume the mortgage.

Subsequently, 144 took the position that the agreement was at an end, purportedly because THMR did not accept Alterna’s terms approving the assumption before the end of the Assumption Approval Period, which 144 asserted was June 6, 2017.

In response, THMR brought an application to the Superior Court of Justice requesting specific performance of the agreement. The presiding application judge, Justice Andra Pollak, found that the mortgage assumption condition was a true condition precedent, which THMR was required to accept “in a legal way.”

Ultimately, she resolved that because there was “no evidence” that THMR had agreed to be bound by Alterna’s assumption terms, the condition precedent was left unsatisfied, thus rendering the agreement null and void. In obiter, Justice Pollak added that she would not have ordered specific performance, because money damages could be determined.

THMR appealed, arguing that the judge erred when she concluded that the condition that THMR obtain permission to assume the Alterna mortgage was not satisfied. It further argued that the judge erred by implying a requirement that the Alterna terms be accepted “in a legal way.” In support of its positions, THMR asserted that the only true condition precedent was the requirement that THMR’s assumption of the mortgage be approved by Alterna. That was the only condition that was dependent on the will of a third party. Consequently, whether it found Alterna’s terms to be acceptable was entirely up to THMR, and as such that aspect of the condition did not constitute a true condition precedent.

Simply put, there was no requirement in the agreement for THMR to confirm its acceptance of the mortgage assumption by signing and returning the assumption approval letter to Alterna. Given that the approval was obtained within the time required by the agreement, the condition precedent was therefore satisfied and placed THMR in a position to demand specific performance of the agreement.

The ONCA set aside Justice Pollak’s decision and ordered that specific performance was available to THMR.

After addressing the condition precedent issue, the ONCA agreed with THMR that the only true condition precedent was Alterna’s approval of its assumption of the mortgage. The ONCA resolved that the judge erred in concluding that THMR was required to confirm its acceptance of the mortgage by signing and returning the assumption approval letter. It explained that the condition precedent was satisfied when Alterna sent its approval letter. Once this occurred, THMR was bound to close the sale transaction, subject to other conditions that could come into play in the agreement.

The availability of specific performance depends on whether an award of damages could allow a party to purchase substitute performance. If the property is unique, then the party could not obtain an exact substitute. The concept of “uniqueness” in specific performance has more to do with a court’s inability to make the party whole by way of damages than with the particular features of property that make it unique. Uniqueness does not mean singularity; rather, it means that the property has distinctive features that make an award of damages inadequate.

In allowing specific performance in this case, the ONCA agreed that the evidence established that there were no suitable alternative commercial properties available in the Port Perry area that THMR could purchase. This was found to be significant because with THMR’s other commercial property, key employees and contractors are located in town. This is why, because of its unique attributes, THMR had been trying to purchase the property since 2015.

THMR Development is of interest to the legal profession because of the manner in which the ONCA addressed the issue of specific performance. In this case, by allowing specific performance the ONCA chose not to focus on whether the property was commercial or residential, but instead focused on whether there was evidence of available substitutes.

Because there were no substitutes, the Court of Appeal did not distinguish between the property being commercial or residential and did not go through an exercise of whether the property was “unique” according to the definition used in the specific performance case law. The uniqueness was assumed by the absence of available substitutes.