The Ontario Court of Appeal recently looked at a case involving a True Condition Precedent in THMR Development Inc. v. 1440254 Ontario Ltd., 28 November 2018.
The purchaser, THMR Development Inc. wished to acquire certain property in Port Perry, Ontario owned by 1440254 Ontario Ltd. The property was subject to a mortgage in favour of Alterna Savings which contained a prepayment penalty of interest in the amount of $258,000.
Usually, a financing condition would allow the purchaser to arrange financing and the Vendor would have to discharge the existing mortgage. In this case, the first mortgage was already in place, and the Vendor wanted to ensure that the Purchaser would take it over. That would eliminate the need for the Vendor to pay the $258,000. In fact, the Purchaser wouldn’t have to pay it either if it simply continued with the financing arrangements and never triggered the prepayment penalty.
This was indeed a True Condition Precedent. No one could agree otherwise, other than Alterna Savings.
This is the clause contained in the Agreement of Purchase and Sale:
“The completion of this transaction is conditional until the 40th business day following the date upon which this Agreement is fully executed (the “Assumption Approval Period”) on the Buyer being approved by Alterna Savings and Credit Union Limited (“Alterna”) to assume the existing first mortgage on the Property (the “Alterna Mortgage”) on terms acceptable to the Buyer.
The foregoing condition is a true condition precedent and cannot be waived.
The buyer shall proceed diligently and expeditiously following the execution of this Agreement to seek approval of Alterna for the said assumption. … In the event that said condition precedent relating to the assumption of the Alterna Mortgage is not satisfied within the Assumption Approval Period this Agreement shall be at an end and the Deposit together without interest earned thereon shall be returned to the Buyer in full.
If the Buyer at Buyer’s sole and absolute discretion is not satisfied with the terms of the existing first mortgage or the terms of the said assumption of the existing first mortgage within the Assumption Approval Period this Agreement of Purchase and Sale shall become null and void.”
Alterna consented to the purchaser’s assumption of the mortgage by letter, dated May 24, 2017, which was also sent to the vendor. Some corrections to the closing date were required.
The Court commented:
The uncontroverted evidence of the appellant’s lawyer was that “Alterna agreed to correct the closing date and simply wanted to be notified once the closing date was finalized.”
“There was also some ambiguity as to the appropriate interest rate for the mortgage assumption. The appellant resolved both issues by direct communications with Alterna.”
Alterna had advised Mr. Zigomanis (the Vendor) by email, in February 2017, months before the agreement of purchase and sale was signed, that: “on an assumption, Alterna does not release the existing guarantees. They will remain in place for the balance of the term.”
This explains why the mortgage assumption condition in the agreement of purchase and sale provided that acceptance was “at Buyer’s sole and absolute discretion”, referring both to satisfaction “with the terms of the existing first mortgage or the terms of the said assumption of the existing first mortgage”.
On appeal there were two issues:
1. Did the application judge err in determining that the agreement of purchase and sale was null and void because the condition precedent in the mortgage assumption provision had not been satisfied?
2. Did the application judge err in finding that an order for specific performance would not be available to the appellant?
(1) Did the breach of a condition precedent vitiate the contract?
The Court of Appeal stated: A true condition precedent exists where the rights and obligations of the contracting parties under the contract depend on a future uncertain event, the happening of which is beyond the control of the parties and which depends entirely on the will of a third party. Until the event occurs, neither party to the contract has a right to performance: See Zhilka v. Turney,  S.C.R. 578, at pp. 583-584, and Barnett v. Harrison,  2 S.C.R. 531.  The application judge found that the jurisprudence on true conditions precedent was not applicable because
“the parties have clearly addressed their minds on what they want the consequences of a failure of the condition precedent to be” by agreeing “that this condition is a ‘true condition precedent and cannot be waived’”. In this case, the only third party was Alterna and the only true condition precedent was Alterna’s approval of the appellant’s assumption of the mortgage.
This is the only part of the mortgage assumption provision that could properly be identified as a true condition precedent, and it was in place so that both the appellant, as buyer, and the respondent, as seller, were not penalized by the prepayment fee.
The condition precedent was satisfied when Alterna sent its approval letter that was then altered slightly to the appellant’s satisfaction.
In our view the appellant (purchaser) was then bound to close the transaction with the respondent (vendor), subject to any other conditions such as the possible fallout from possible surprises revealed by the property inspection refused by the respondent (vendor).
Consequently, the application judge erred in concluding that the appellant was required to confirm its acceptance formally by signing and returning the assumption approval letter to Alterna to satisfy the condition precedent.
It is interesting here that there was no Notice of Fulfillment signed at all. It was not necessary. The Court was merely looking for evidence that Alterna had approved the assumption. The letter which Alterna wrote was sufficient. That was the evidence of compliance with the True Condition Precedent. No one needed the Notice of Fulfillment.
Many real estate agents operate under the theory that a Notice of Fulfillment is required for True Conditions Precedent. That’s not the case. The NOF document itself was drafted since the Waiver wouldn’t work and was not allowed. The Supreme Court of Canada decided that in 1959 in Turney v. Zhilka (see above).
The NOF document has also been extended to be used in the case of regular Conditions Precedent, when no third party is present. In fact, it is oftentimes used in lieu of the Waiver.
Following this case, one wonders whether the Notice of Fulfillment Form should not be used at all, ever. It’s not used in many other jurisdictions.
Brian Madigan LL.B., Broker