Buyers Sue Builder Over Builder Invoking Early Termination Clause

Park Avenue Homes Corp. (“Park Ave”) was offering pre-construction homes for sale on land owned and developed by 739034 Ontario Inc. (“739”). Park Ave and 739 worked together to develop and build on 739’s lands, and entered into a sub-division agreement with the town to do so.

In 2016, five buyers signed agreements of purchase and sale with Park Ave; they had no contracts with 739.  Each agreement was conditional on the timely fulfillment of an Early Termination Clause (“ETC”) that required Park Ave to take “all commercially reasonable steps within its power” to obtain various agreements with the relevant Approval Authorities and neighbouring landowners.  

Among the required contracts was a Cost Sharing Agreement (CSA) with the unaffiliated owners of the surrounding, still-undeveloped lots that “landlocked” 739’s property.  The CSA covered the needed infrastructure and road works that would benefit all parties mutually in their various land development plans. Unfortunately these negotiations – for which 739 was solely responsible but which directly impacted Park Ave – took an unexpectedly long time.  Ultimately the CSA was only signed in July of 2018.

By early 2017, and with no timeframe for beginning construction, Park Ave realized that 739 would be unable to conclude the CSA within the deadline set in the ETC.  Claiming it had met its duty to make reasonable efforts and act in good faith, Park Ave invoked the early-termination portion of the ETC and refunded the five buyers’ deposits.

The five buyers sued, and on a motion for summary judgment asked for specific performance and damages. The fundamental issue for the court was whether Park Ave breached its duty of good faith and honest performance in these circumstances.  Park Ave argued that it relied on 739 which, as developer, was the only legal entity that could negotiate the CSA and register the subdivision plan that allowed Park Ave’s homes to be built. It claimed there was little or nothing it could do to hasten the CSA negotiations along.

The court agreed.  In concluding that Park Ave had discharged its good faith obligations, it took into account the reality of the situation. Whether Park Ave’s steps were commercially reasonable had to be assessed against the fact that it was reliant on an external event over which it had no real control. By effectively delegating the negotiation and completion of the CSA to 739, Park Ave had acted in a commercially reasonable manner: The two companies were separate, but they communicated regularly and cooperated so that the homes sold by Park Ave could be built.

Turning to the specific efforts by 739 to obtain the CSA, the court found these were significant and bona fide as well; they included retaining the assistance of legal counsel and a planner. Although there were some delays in the process, the court noted that perfection is not required to meet the good faith standard or the contractual requirement of commercial reasonableness.

Indeed, it was more honest of Park Ave to notify the five buyers and terminate their agreements in early 2017, rather than hold on to their deposits and continue to wait.  The court accordingly dismissed the buyers’ claim.  See Li v. Park Avenue Homes Corp., 2019 ONSC 1147.