Court Explains Nature of "True Condition Precedent"

In a case called THMR Development Inc. v. 1440254 Ontario Ltd., the Buyer and Seller had entered into an Agreement of Purchase and Sale respecting a mixed residential/commercial property. The property was subject to a closed mortgage with a lender, and the parties wanted to keep the mortgage in place to avoid a $258,000 pre-payment penalty. The Agreement therefore included a mortgage assumption provision, requiring the lender to approve the sale transaction.

That mortgage assumption provision included what it termed a “true condition precedent” that could not be waived: That the Buyer must be approved by the lender to assume the existing first mortgage, on terms the Buyer found acceptable. If within a stipulated period the Buyer – at its sole and absolute discretion – was not satisfied with the terms of the existing first mortgage, then the Agreement would be null and void.

The lender did consent to the Buyer’s assumption of the mortgage, by way of a letter. However, that letter listed some minor terms and conditions that had to be remedied before closing, including a closing date correction. The Buyer dealt with the lender directly to resolve those, but never formally signed and returned the approval letter containing the lender’s offer, as the Agreement technically required.

The Seller claimed this meant the true condition precedent was never satisfied, and the Agreement was at an end. In light of the Seller’s position, the Buyer applied to the court for specific performance of the Agreement.

The lower court judge ruled that the proper interpretation of the mortgage assumption provision called for the Buyer to have accepted “in a legal way” to be bound by the lender’s terms. The judge concluded there was “no evidence” here of legal acceptance on the Buyer’s part.

The Court of Appeal reversed the lower court judge’s ruling. First, it noted that a true condition precedent exists where the parties’ rights and obligations under the contract depend on a future uncertain event, the happening of which is beyond either of their control, 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.

Here, the only third party was the lender, and the only true condition precedent was its approval of the Buyer’s assumption of the mortgage, under the mortgage assumption agreement. That condition precedent was satisfied when the lender sent its approval letter – which was later amended only slightly, and to the Buyer’s satisfaction. At that point the Buyer was bound to close the deal with the Seller.

The Court also held that specific performance was an available remedy instead of damages in this case, because there were no suitable, alternative commercial properties in area. If the lender was willing to approve the mortgage assumption again, then the transaction could proceed. If not, the Court would entertain further submissions. See: THMR Development Inc. v. 1440254 Ontario Ltd., 2019 ONCA 954.