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Court Rejects Buyer’s Bad Faith Bid to Reinstate “Time of the Essence” Clause

In a recent decision in 1250364 Ontario Ltd. (c.o.b. Lionshead Homes v. Townend), the court considered the legal validity of a buyer’s unilateral attempt to reinstate a “time is of the essence” clause in an agreement, despite the fact that the closing date had been repeatedly and mutually extended by the parties.

The buyer, Townend, had agreed to purchase a newly-constructed home from the builder, Lionshead Homes. However, because the house was sited too close to the property line, it became necessary to make a minor variance application to the municipality. Unfortunately, the application could not be processed in time for the scheduled June 26, 2008 closing, so Townend and the builder agreed that pending the application’s approval (which both parties considered a mere formality) Townend would move into the home under an occupancy agreement. This agreement expressly preserved the “time is of the essence” clause of the original contract, extended its legal closing date by just over a month, to July 30, 2008, and effectively set a terminal closing date 150 days later, i.e. October 29, 2008.

Townend moved into the home in early June of 2008 as planned. However, the minor variance was still not resolved by the extended closing date in July as it had been circulated to the municipality’s Department of Engineering and Public Works, which objected to the application on several grounds. When it was finally put before the Committee of Adjustment, the application was deferred to the end of September 2008, and then again to December 1, 2008.

Faced with this additional delay, and with the need for a further extended closing date, Townend’s lawyer wrote to the builder’s lawyer, purporting to re-establish that “time was of the essence” in the deal, and setting a new November 10, 2008 closing. The builder’s lawyer never replied to that letter, and Townend tendered on that date, despite knowing that the deal could not legally close.

Eventually, in late December of 2008, the Committee of Adjustment conditionally granted the minor variance application. Townend’s lawyer nonetheless wrote to the builder’s lawyer purporting to give 60 days’ notice that he was vacating (as required by the occupancy agreement), and requesting the return of the $85,000 deposit he had paid. At this point, the builder considered Townend to have repudiated the contract, and sued him for its breach, claiming damages as well as the right to keep his deposit.

When the matter came to court, the key question was whether Townend’s letter was legally effective to reinstate the “time is of the essence” clause. In this instance, the court found that it was not. First of all, a “time is of the essence” clause in a purchase agreement is enforceable (or not) according to its terms. If such a clause remains pertinent but neither party is ready to close, then the agreement remains in effect and the clause can then be reinstated by one party setting a new closing date and providing reasonable notice of it to the other. With that said, a “time is of the essence” clause may not be insisted on by a party who has not shown him or herself “ready, desirous, prompt and eager” to carry out the agreement. Essentially – as with every contract’s performance -- there is an overarching duty of good faith.

In this case, Townend did not meet that duty. For one thing, the letter from his lawyer included new conditions which were more onerous than those that had been contained in the original agreement. The court wrote:

“[The lawyer] larded the letter with new and onerous conditions that went well beyond the original Agreement of Purchase and Sale and the occupancy agreement. He did this to attempt to secure collateral advantages for Mr. Townend, but that is not the way in which the reinstatement of the time of the essence is permitted to operate.”

Moreover, the new November 2008 closing proposed in the letter was not reasonable given the fact that the parties were aware of the delayed status of the minor variance application.

Finally, the timing of the letter was also troubling. The eventual approval of the minor variance application was essentially a “done deal” at that point, so Townend’s decision to send it nonetheless was indicative of bad faith on his part (and the court noted that at that point, Townend had already entered into an agreement to buy another home in the area with a closing date sometime after November 2008).

Ultimately, the court found that Townend had ceased to be “ready, desirous, prompt and eager” to carry out his side of the bargain, which disentitled him from reinstating the “time is of the essence” clause and setting a new closing date. To the contrary, his actions constituted a repudiation of the original agreement on his part, and triggered the builder’s right to sue for damages. See 1250364 Ontario Ltd. (c.o.b. Lionshead Homes v. Townend, 2012 (ONSC).