Thursday, May 2, 2013
If an offer to purchase is conditional upon the purchaser obtaining financing, which fails to materialize, can the purchaser cancel the deal?
The Quebec Court of Appeal decision in Hazan et al. v. Madeco Mascouche Inc., 2012 QCCA 2056, provides an informative illustration.
The facts of the case can be summarized as follows:
• The purchaser and seller signed an offer to purchase a building to be built by the seller.
• The offer to purchase was conditional upon the purchaser obtaining financing.
• The financing was approved subject to the condition that at the time of disbursement, leases shall have been concluded with an aggregate rent of at least $22,800.
• Seven weeks after the financing was conditionally approved, the lender unilaterally changed the condition to add a ten percent withholding requirement until the property is fully leased.
• The purchaser never objected to the change in condition nor did he inform the seller.
• The purchaser paid a deposit to the seller as well as progress payments according to the completion of various stages of construction as prescribed in the offer to purchase.
• The purchaser refused to sign the deed of sale within the stipulated delay due to the refusal of the lender to disburse the financing on the ground that the conditions for financing were not fully satisfied.
• Due to his inability to obtain financing, the purchaser claimed cancellation of the deal as well as reimbursement of his deposit and all progress payments that he had paid to the seller.
Based on the evidence, the Court found that the purchaser had not made any serious effort to lease the property, which was a condition precedent required by the lender. The purchaser’s attitude was described by the Court as tentative and passive, which it considered to amount to negligence and was in contrast to the proactive, diligent attitude that was recognized by the case law as being required in similar situations.
In effect, although the sale was conditional upon the purchaser obtaining financing, a contracting party is required by law to act diligently and in good faith with respect to the performance of his contractual obligations, including actively taking all reasonable means to perform his obligations and satisfy any conditions precedent upon which his obligations depend.
Furthermore, based on the evidence, the Court concluded that the purchaser never had the financial means to acquire the property and was at all relevant times, financially stretched to the limit. In the words of the Court, the purchaser entered into the contract to purchase in the same manner as houses were recently being built in Spain i.e. irresponsibly.
When a contract is cancelled, the law requires that the parties, to the extent reasonably possible, should be financially restored to the situation that they were in immediately prior to concluding the contract. The purchaser relied on this principle as the basis for his claim for reimbursement of the deposit and progress payments. However, as is often the case, the offer to purchase included a penal clause which allowed the seller to retain all amounts that it received up until the termination of the contract, in the event of the purchaser’s default. Moreover, purchaser made no effort to attack the validity of the penal clause on the ground that it was abusive.