Fundamental Breach and the Sale of Real Property: Timing is Everything
Posted in Development, REDMA

Many land developers arrange to sell lots in a proposed development before the subdivision is completed.  The vendor benefits from the promise of confirmed future sales and non-refundable deposits.  Purchasers benefit from lower prices for purchasing early.  However, what happens if the land development is delayed.  Can a purchaser get a non-refundable deposit back?

The answer is: it depends.  For the most part, it depends on the terms of the written agreement between the parties but it can also depend on the timing of a critical decision by the purchaser.  That decision is whether or not to treat a vendor’s delay in closing the transaction as a fundamental breach of the contract.  Equally important is when to make and communicate that decision.

A recent case in the Court of Appeal provides a good example.  A purchaser paid a $620,000 deposit towards the purchase of 31 lots in a proposed subdivision.  The lots were to be conveyed when they were in a “ready to build” state.  The contract provided that the lots were to be ready by December 18, 2012.  The lots were not ready, largely for reasons outside the seller’s control.  The purchaser did not initially complain to the seller about this delay.  Four months later, the purchaser wrote to the seller asserting that the contract had automatically terminated on December 18, 2012 because the condition precedent of having “ready to build” lots had not been fulfilled.  The purchaser demanded the return of the deposit because of the seller’s breach.

The Seller responded by taking the position the purchaser’s letter amounted to a repudiation of the contract which the seller accepted, bringing the contract to an end.  As it was the purchaser who breached the contract, the seller was entitled to keep the deposit.  The purchaser then sued for the return of the deposit.

In resolving this positional standoff, the Court sided with the seller and awarded it the deposit.  In doing so, the Court made interesting observations on when and whether a contract “automatically terminates” on the expiry of a condition precedent.  The court also gave guidance on when a party must decide if there has been a fundamental breach of contract.

For any condition precedent where its fulfillment depends, in part, on the conduct of a third party (such as a municipal planning department), there is an implied obligation on the party benefiting from the condition to take all reasonable steps necessary to fulfill it.  That means, for example, presenting and seeking approval of a subdivision plan in a timely and proper way if that is a condition of the sale.  In this case, the seller discharged that obligation.  But did the passage of the December 18 deadline nonetheless automatically terminate the contract?

The expiry of a condition precedent deadline will not necessarily result in the automatic termination of a contract, even where the contract provides that “time is of the essence”.  In this case, the contract had an “absolute deadline” for completion a year after the December 18 deadline.  This led the court to reason that what was important to the purchaser was not the exact completion date but that the purchaser would acquire “ready to build” lots.  This meant the December 18 deadline was not essential to the bargain.  What was essential was that the lots be ready “within a reasonable period of time” and at some point prior to the “absolute deadline”.  As a result, there could be no “automatic termination”.

The court also found that the purchaser waited too long to take the positon that the failure to convey “ready to build” lots by December 18 was a contract breach requiring the return of the deposit.  If a party wishes to treat the conduct of another as a fundamental breach of contract, thus bringing the contract to an end, they must make that decision “promptly” and communicate it to the other side.  You cannot “wait and see” without risking the loss of the ability to end the contract.  As the court noted:

Either a contract is not repudiated and the rights and obligations under it still exist, or the contract is rescinded because of an accepted repudiation and then very different rights come into being in respect of a cause of action.

In this case, the purchaser waited too long to complain about the failure of the seller to meet the December 18 deadline.  This meant that it was too late to end the contract for failure to complete.  Despite the passage of the December 18 deadline, the contract continued to exist.  To make matters worse, the purchaser’s letter saying it would not complete the contract was itself an anticipatory breach which the seller accepted (in a timely way).  This meant that the purchaser, rather than the seller, breached the contract and the seller was entitled to keep the deposit.

If a condition precedent has expired or a contractual deadline has passed, you need to make timely decisions about the possible consequences to you.  Is the underlying obligation fundamental?  Do you want to treat the contract as over?  If you do, then you need to tell the other side as soon as possible.  Waiting to do so may backfire on you as it did in this case.


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