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Don’t Be Frustrated by Pre-Closing Damage!

 

CASE COMMENT

Maison Development & Construction Ltd. v. Jefferson, 2015 BCSC 1329

In a recent decision, the BC Supreme Court dealt with the doctrines of specific performance and frustration, and how they apply to the destruction of buildings prior to closing.

Facts

In December, 2012 the defendant, as vendor, and the plaintiff, as purchaser, entered into a contract of purchase and sale for a residential property in Maple Ridge for the purchase price of $1.4 million, with completion, adjustment and possession dates of December 19, 2014. The plaintiff intended to rent the property and redevelop it in the future.

On or about December 16, 2014, a fire destroyed the house, garage and woodshed located on the property. The parties entered into amending agreements to change the completion, adjustment and possession dates to on or before February 19, 2015, and on or before March 6, 2015, respectively.  The decision indicates that the amendments were entered into in order to give the parties time to determine the effect of the destruction of the buildings on the positions of the parties.

The defendant’s position was that the contract was frustrated because the destruction of the buildings went to the root of the contract. It was an implied term that the buildings would be transferred with the property. “Because of the fire, the parties are left in a position where any attempted performance of the contract of purchase and sale would result in a bargain that neither party intended or anticipated”. The defendant did however offer to sell the property for $1,126,000, which was the allocation of value to the land in the then current Property Assessment Notice. This offer was made on March 5, 2015 and included a proposed completion date of on or before March 16, 2015.

The plaintiff rejected the defendant’s proposal, and in a tender letter to the defendant’s lawyer, offered the defendant more time to replace the house so that the defendant could comply with her obligations under the contract. The sale did not complete on the completion date and on May 7, 2015 the plaintiff commenced an action for specific performance.

Questions Considered by the Court

  1. 1. Was the contract frustrated?
  2. 2. If the doctrine of frustration does not apply, is the plaintiff entitled to specific performance?

 

Analysis

Frustration

In its analysis, the Court quoted the following definition of frustration from a leading case on the doctrine:

“Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes that nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance.”

The Court found that the conveyance of the house and other buildings was a fundamental term that went to the root of the contract, and that to require completion of the sale despite the destruction would be to impose on the parties something radically different from that for which they contracted.  However, because the contract included the following “Risk” clause,

“All buildings on the Property and all other items included in the purchase and sale will be, and remain, at the risk of the Seller until 12:01 a.m. on the Completion Date. After that time, the Property and all included items will be at the risk of the Buyer.”,

the Court found that the parties made provision for the supervening event that occurred which was foreseeable – the chance that the buildings would be damaged or destroyed by fire prior to the completion date. The defendant was therefore not entitled to rely on the doctrine of frustration.

Specific Performance

With respect to specific performance, the Court noted that the defendant should not be expected to rebuild the house and other buildings and convey new buildings with land when the contract provided for the conveyance of older buildings. In addition, this would be impossible to complete by the completion date.

Decision

In the end, the Court’s decision was a reasonable compromise. The defendant had offered to convey the land to the plaintiff with a purchase price reduction, and this is the approach the Court took.

This case illustrates the importance of well drafted contracts. The Risk clause in this case is the standard language from the Real Estate Board’s residential contract of purchase and sale. In a commercial transaction, the decision in this case might not be agreeable to a purchaser or vendor. A well drafted purchase contract for commercial real estate will include a risk clause that permits a purchaser to elect (i) to terminate the contract if damages greater than a certain amount (often 10%) prior to closing, or (ii) to close and take an assignment of the insurance proceeds.


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