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'Sole & Absolute Discretion' Mortgage Assumption Condition Tested

As part of the agreement to purchase the seller’s property for $36 million, the buyers had agreed to assume two existing mortgages. The agreement’s mortgage assumption clause required them to: (1) proceed “in good faith and with due diligence” to apply to the existing mortgage lenders for their approval of the mortgage assumption; and (2) provide those lenders with any information reasonably requested by them as part of the application process. Once the buyers had done as required, they would be entitled – at their sole discretion – to decide whether the terms that the lenders offered were acceptable, and if so, to proceed to complete the purchase or not.

As it turned out, after making initial inquiries, the buyers did take exception to the onerous conditions imposed by one of the two lenders (which required, among other things, the payment of $230,000 as a “reserve” for 10 months’ interest payments and $21,000 as a lender’s fee). The buyers promptly decided not to proceed with the purchase; yet the seller refused to return to them the $2 million that had been put down as a deposit. The parties asked the court to settle the dispute.

The buyers conceded that although they had contacted the second lender once in order to make initial inquiries, they never made a formal mortgage assumption application to that lender, and did not provide documents as requested. Although this technically fell short of satisfying their “good faith and due diligence” obligations, the court concluded that it was not fatal: the nature of the lender’s initial reply made it obvious in the circumstances that the submission of a formal application would have been an “exercise in futility”, and the lender would not be accepting their request to assume the existing mortgage in any event.

The court pointed out that in interpreting a commercial contract, it must construe the agreement as a whole, in a manner that gives meaning to all the terms, yet avoids an interpretation that renders one or more of those terms ineffective. Here, the wording of the mortgage assumption condition, being “on terms and conditions satisfactory to the Buyer, in its sole and absolute discretion” would be meaningless if the Court overrode it by finding in the seller’s favour. The court therefore held for the buyers, and ordered their deposit returned.

See International Property Group Inc. v. 2262814 Ontario Ltd., 2016 (ONCA) affirming International Property Group Inc. v. 2262814 Ontario Ltd., 2015 (ONSC).