SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: CV-11-435601
DATE: 20120718

RE: Creview Developments Inc., Applicant

AND:

Nicholas Developments Inc., Respondent

BEFORE: Justice E. P. Belobaba

COUNSEL:
Marco Drudi for the Applicant (Vendor)

Alistair Riswick for the Respondent (Purchaser)

HEARD: June 22, 2012 with additional written submissions

ENDORSEMENT

[ 1 ] The issue in this application is whether the Purchaser, Nicholas Developments, is obliged, under the ‘security deposit’ provisions in an Agreement of Purchase and Sale, to replace its original $64,000 letter of credit with another because the first was drawn down by the Vendor, Creview Developments.

[ 2 ] For the reasons set out below, I find that the Purchaser is not obliged to do so. The application is therefore dismissed.

Background

[ 3 ] The applicant sold 64 building lots to the respondent in 2004. Under Article 11 of the APS, the Purchaser was required to provide a security deposit in the amount of $64,000 ($1000 per lot) for damage caused by the Purchaser during construction. The security deposit could be paid in cash or by way of a renewable letter of credit (“L/C”). In this case, the Purchaser provided an L/C.

[ 4 ] For ease of reference, I have set out sections 11.01 to 11.05 of the APS in the appendix.

[ 5 ] Under these provisions, the Vendor can draw down from the security deposit at any time to pay for any damage as determined by its consulting engineer. The Purchaser is required, upon demand by the Vendor, to “reinstate” or top-up the security deposit to keep it at $64,000.

[ 6 ] Section 11.04 deals with the return of the security deposit and is particularly important.

[ 7 ] The Purchaser was one of several builders in the subdivision. The agreement made between the Vendor and this builder was different from the agreements made between the Vendor and the other builders. The parties herein changed the wording of section 11.04. Prior to the change, the standard APS provision read as follows:

Section 11.04 Return of Security Deposit

Subject to the provisions of this Article XI, the Security Deposit or the balance thereof remaining shall be returned to the Purchaser on the date which is sixty (60) days following:

(i) the date upon which the Municipality certifies, in writing, its final acceptance of the Services pursuant to the Subdivision Agreement;

(ii) the date the Vendor’s Consulting Engineer has given its security of completion with respect to the Services and;

(iii) the date the Vendor has been released from the terms of the Subdivision Agreement and all letters of credit and other security has been returned by the Municipality or other governmental Authority to the Vendor.

[ 8 ] The parties amended section 11.04 to read as follows:

Section 11.04 Return of Security Deposit

Subject to the provisions of this Article XI, the Security Deposit or the balance thereof remaining shall be returned to the Purchaser as follows:

(a) fifty (50%) per cent to be returned upon the Purchaser obtaining final grading certificates for its lots from the Consulting Engineer and the local authorities; and

(b) fifty (50%) per cent when top coat asphalt on roads has been completed.

[ 9 ] In due course, the Vendor installed the in-ground services - such as the roadway with a base coat of asphalt and the base curbs – and the Purchaser started building the houses. When the houses were ready for occupancy, the Purchaser advised the Vendor accordingly and the top curbs and the sidewalks were installed. The Purchaser then graded and sodded the lots.

[ 10 ] The Purchaser sold all of its homes by early March, 2008. About a year later, the Purchaser completed the grading and landscaping. In May, 2009, the Vendor’s consulting engineer issued the final grading certificate for the Purchaser’s lots.

[ 11 ] The Purchaser then asked the Vendor to reduce the L/C by 50 per cent as required by section 11.04(a). In September, 2009, the Vendor confirmed to the Bank of Montreal (which had provided the L/C) that the amount of the L/C should be reduced to $32,000. The Vendor returned the original L/C to the Bank which then issued a new L/C for $32,000.

[ 12 ] About a year later, in mid-October, 2010, the Vendor put the top coat of asphalt on the roads. The Purchaser gave notice to the Vendor on October 20, 2010 that the remaining $32,000 L/C should now be returned pursuant to section 11.04 (b) of the APS. The Vendor refused to release the L/C and subsequently drew down the remaining $32,000. The Purchaser sued the Vendor to recover this amount. The Vendor, in turn, brought this application to compel the Purchaser to top-up the security deposit and provide yet another $64,000 L/C.

The position of the parties

[ 13 ] The Purchaser submits that it is not contractually required to provide yet another $64,000 L/C. The L/C is only required while the Vendor has the right to a security deposit. The Purchaser points to the amended section 11.04. The security deposit must be returned in two stages based on two events – the final grading and the top coat of asphalt. The Vendor agrees that both events have occurred. The security deposit, or whatever was left of it, had to be returned. The security deposit obligation had expired. The Purchaser argues there is no (further) obligation to provide a letter of credit independent of the security deposit.

[ 14 ] The Vendor relies on the last two sentences in section 11.01 that provide as follows:

The Purchaser agrees to maintain such Letter of Credit in good standing, and renew the same from time to time, as may be required by the Vendor, until such time as set out in Section 11.04 hereof. Notwithstanding the foregoing, the Vendor shall have the right, at any time or times, to require that the Purchaser issue or reissue such Letter of Credit to the order of the Vendor or the Municipality, or to assign such Letter of Credit to the Municipality, in replacement of any letter of credit previously given by the Vendor to the Municipality.

[ 15 ] The Vendor argues that the last sentence, in particular, cannot be any clearer: “notwithstanding” section 11.04, the Vendor can require the Purchaser to issue or re-issue the $64,000 L/C “at any time”. The phrase “at any time”, says the Vendor, must be taken literally. The Purchaser can be required to provide further L/C’s to maintain the original $64,000 level even if the security deposit has been returned pursuant to section 11.04.

Analysis

[ 16 ] I agree with the Purchaser.

[ 17 ] When Article 11 is interpreted in context and harmoniously with all of its sub-parts, it is clear to me that any obligation to provide additional L/C’s ends with the return of whatever remains of the security deposit, or if nothing remains, with the expiration of the obligation to maintain a security deposit. The obligation to provide additional L/Cs to maintain the $64,000 level is not independent of the obligation to provide a security deposit. Any other interpretation wouldn’t make sense.

[ 18 ] Here, the top coat of asphalt was applied to the roadways a full year after the final grading certificate was issued and the Purchaser had completed all of its construction activity – plenty of time for the Vendor’s consulting engineer to do a final damage inspection and for the Vendor to drawn down damage monies from the L/C and indeed require further L/C’s if more funds were needed to cover the damage claims. That is, I am not suggesting that the Vendor was precluded from drawing down the remaining $32,000 (or indeed asking for more if more funds were needed). [1]

[ 19 ] However, in my view, there is no contractual basis for the Vendor’s request for a further L/C after the obligation to maintain a security deposit had expired. As counsel for the Purchaser correctly noted, it was not the intention of the parties that the security deposit should stay in place indefinitely. The amendment to section 11.04 made clear that the Purchaser was (no longer) required to provide a security deposit for the entire time period that the Vendor had its security lodged with the municipality.

[ 20 ] In my view, it is important to distinguish between the contractual obligation to provide and maintain a security deposit and return it when contractually required, on the one hand, and provisions dealing only with situations involving a letter of credit .

[ 21 ] Consider what would have happened if the Purchaser had paid the security deposit using cash rather than an L/C. The same provisions would have applied – the Purchaser would have been obliged to provide more cash as needed to maintain the $64,000 level. However, once the top coat of asphalt had been applied to the roadway, the cash remaining had to be returned. The obligation to provide and maintain a $64,000 security deposit would have expired.

[ 22 ] If cash had been used to provide the security deposit rather than an L/C, the last two sentences in section 11.01, which refers only to L/C’s, would not apply and the analogous suggestion by the Vendor that it could insist on further injections of up to $64,000 in cash “at any time” even after the security deposit was returned, would not be contractually available and frankly would not make sense. Could the Vendor require the Purchaser to provide a further $64,000 in cash long after the roadway had been given its final coat of asphalt and the security deposit had been returned? Of course not. Why should it be any different if an L/C is used rather than cash?

[ 23 ] In my view, the last two sentences in section 11.01 are intended to make clear that the Vendor’s right to require further L/C’s is not limited to ensuring that the $64,000 level is always maintained, but also extends to situations where the L/C has to be issued or reissued “to the order of the municipality” or assigned to the municipality “ in replacement of any letter of credit previously given by the Vendor to the municipality.” Subject always, I would add, to the triggering events in section 11.04. In my view, the last two sentences in section 11.01 cannot sensibly be interpreted to mean that the carefully amended section 11.04 is vitiated and rendered meaningless.

[ 24 ] A final comment. When the security deposit is required to be returned under section 11.04, there may well be a contractual basis for a final draw-down and even, possibly, a final topping-up request (this will no doubt be decided in the related action) but if time goes by, as here, and the obligation to provide a security deposit has clearly expired, there is no contractual basis for the Vendor’s request that the Purchaser must provide another and completely new security deposit either via cash or letter of credit.

Disposition

[ 25 ] The application is dismissed.

[ 26 ] The parties have agreed that a $5000 costs award is fair and reasonable. Costs are therefore fixed at $5000 all-inclusive, payable forthwith by Creview Developments to Nicholas Developments.

[ 27 ] I am obliged to counsel for their co-operation and assistance.

Date: July 18, 2012

Belobaba J.

Appendix

Section 11.01 Security Deposit

In addition to any other sums to be paid to the Vendor, the Purchaser shall pay to the Vendor on the Closing Date, a security deposit in the amount SIXTY FOUR THOUSAND DOLLARS ($64,000.00) calculated on the basis of TWO (sic) THOUSAND DOLLARS ($1,000.00) per dwelling unit to be erected on the Lands, (herein called the “Security Deposit”). The Security Deposit shall be held as a deposit on account of the indemnity given by the Purchaser referred to in Article X. The Security Deposit may be paid by an unconditional, irrevocable and automatically renewable Letter of Credit issued by a Canadian Chartered Bank in a form acceptable to the Vendor. The Purchaser agrees to maintain such Letter of Credit in good standing, and renew the same from time to time, as may be required by the Vendor, until such time as set out in Section 11.04 hereof. Notwithstanding the foregoing, the Vendor shall have the right, at any time or times, to require that the Purchaser issue or reissue such Letter of Credit to the order of the Vendor or the Municipality, or to assign such Letter of Credit to the Municipality, in replacement of any letter of credit previously given by the Vendor to the Municipality.

Section 11.02 Damage

The Vendor shall be entitled to deduct from the Security Deposit, from time to time, any amount or amounts on account of any Damage to the Services as determined in accordance with Article X. It is understood and agreed that the Purchaser’s liability for any Damage, is not limited to the amount of the Security Deposit and in the event that the Damage and the quantum assessed by the Vendor’s Consulting Engineer, shall be in excess of the amount of the Security Deposit then held by the Vendor, the Purchaser shall forthwith upon being notified of the amount of such Damage, and the amount over and above the amount then held on account of the Security Deposit, pay the amount of such excess to the Vendor by certified cheque, and in the event that the balance of the Security Deposit being held by the Vendor is at any time less than the amount provided for in Section 11.01, the Purchaser shall forthwith upon demand pay to the Vendor the sum required to reinstate the Security Deposit to such amount.

Section 11.03 Deduction for Damage

The Vendor shall be entitled from time to time to deduct from and appropriate for its own purposes, all or any portion of the Security Deposit on account of any Damage to the Services, as well as on account of any breach or breaches by the Purchaser of any of the other covenants or provisions contained in this Agreement.

Section 11.04 Return of Security Deposit

Subject to the provisions of this Article XI, the Security Deposit or the balance thereof remaining shall be returned to the Purchaser as follows:

(a) Fifty (50%) per cent be returned upon the Purchaser obtaining final grading certificates for its lots from the Consulting Engineer and the local authorities; and

(b) Fifty (50%) per cent when the top coat asphalt on roads has been completed.

Section 11.05 Security Deposits

The Purchaser covenants and agrees that in the event that the Subdivision Agreement or any other agreement affecting the Lots purchased requires a deposit with the Municipality or any other competent authority as security for completion of any item which is the Purchaser’s responsibility in accordance with this Agreement or the responsibility of a builder generally, including, but not limited to, paving, final grading, sodding, hydro installation from the lot line to the meter, installation of water storm sanitary connections from the lot line to the dwelling, damaging of any subdivision or municipal works, or prohibition against occupancy, the Purchaser shall, at its sole cost and expense on the Closing Date deliver to the Municipality and/or any other competent authority and/or the Vendor if the Vendor has already provided the security to the Municipality or authority as the Vendor may direct, cash or a letter of credit from a Schedule “A” Canadian chartered bank and in a form satisfactory to the Vendor and/or the Municipality and in an amount equal to the amount required pursuant to the Subdivision Agreement or any other agreement. Such letter of credit shall be held by the Municipality and/or competent authority and/or the Vendor in substitution for any security already provided or required to be provided by the Vendor, to the Municipality or competent authority and shall be dealt with by the Municipality and/or competent authority and/or the Vendor in accordance with the terms of the Subdivision Agreement or any other agreement. If the Municipality and/or competent authority shall, on a per lot or per unit basis, authorize or agree to reductions in such security from time to time upon the Purchaser having completed the work on such Lot or Unit, such letter of credit shall be reduced or cancelled for the affected lot or unit as applicable. ( my emphasis )

[1] I recognize that the draw-down of the remaining $32,000 is the subject of a separate proceeding so I will refrain from any further comment.