CITATION: Mikhalenia v. Drakhshan, 2015 ONSC 1048

COURT FILE NO.: CV-13-490302

DATE: 20150217

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Arkadi Mikhalenia, Applicant

AND:

Afrooz Drakhshan and Homelife Bayview Realty Inc. Brokerage, Respondent(s)

BEFORE: Akhtar, J.

COUNSEL: David Fogel, for the Applicant

Jeffrey D. Gray, for the Respondent(s)

HEARD: January 30, 2015

ENDORSEMENT

OVERVIEW

[1] This is a motion by the Plaintiff, Arkadi Mikhalenia, to obtain summary judgment for an order that monies deposited by the Defendant, Afrooz Drakhshan, into a trust account held by the second Defendants, Homelife Bayview Realty Inc., Brokerage (Homelife), be forfeited as a result of a breach of a real estate agreement.

[2] The Plaintiff is the owner of a property located at 45 Finch Avenue West in Toronto, (hereinafter called “the Property”) and, on May 16, 2013 entered into an agreement to sell the property to the Defendant. An Agreement of Purchase and Sale (APS) was signed by both parties, one of the stipulations being that the Defendant pay into trust the amount of $100,000.

[3] The Defendant’s intention was to build a commercial medical building to house her medical practice and she required a building in which she could install underground parking. Prior to the agreement, the Defendant had shown an interest in the neighbouring property of 43 Finch Avenue West. However she was unable to acquire this particular building. She therefore pursued the Property owned by the Plaintiff after concluding that it was of the same size and location. The Defendant’s agent advised her that the Property was suitable for the medical building that she sought to construct, that the Property had been granted zoning permission and could be built with underground parking. Significantly, the APS did not contain any conditions making the sale contingent upon the construction of an underground parking lot.

[4] It is also agreed that prior to entering the APS, the Defendant did not commission an engineer, architect or other person with the requisite expertise to advise on the feasibility of an underground lot.

[5] Negotiations to buy the Property were conducted by the Defendant’s agent. It is undisputed that the Defendant and the Plaintiff did not meet until after the APS had been agreed.

[6] On May 24 or 25 2013, the Defendant was advised by an architect that due to the width of the property, a parking lot could not be built. The Plaintiff and the Defendant met for the first time on June 8, 2013. At that meeting the Defendant was able to view plans prepared by the Plaintiff for a building that he had, at one stage, hoped to build on the Property. One notable feature of the plans was that the only planned parking available was above ground.

[7] In September 2013, the Defendant made two requests for a 4-month extension to the completion date of the APS on the grounds that there had been misrepresentations on the issue of zoning. On September 18, 2013, the Defendant instructed her lawyer to correspond with the Plaintiff’s lawyer to cancel the transaction, claiming that the Defendant had only signed the APS for reasons of duress, undue influence and misrepresentation. (At her later cross-examination for discovery, the Plaintiff would concede that there was no basis for the assertions of duress and undue influence.) The Plaintiff refused to agree to a termination of the deal. As a consequence of that refusal, the Defendant sought an extension of time to complete the transaction.

[8] Subsequently, on February 19, 2014, the Defendant made a second offer for the Property in the sum of $1,499,000.00 with a further deposit of $1.00 and the original deposit of $100,000 to be part of that offer. The Defendant did so to “save” her original deposit of $100,000. She reasoned that the “only way to save the 100,000 is to just close this deal”.[^1] The Plaintiff responded with a counter offer of $1,555,000.00 with a further deposit of $100,000. In response, the Defendant made a third offer of $1,505,000.00 with the original deposit being applied to this new offer and a $1.00 security deposit. A third counter offer was made by the Plaintiff but rejected. On each offer made by the Plaintiff, it was made clear that the original deposit was not to be transferred from the original APS without a further $100,000. By the time of the Plaintiff’s third offer, the Plaintiff explicitly informed the Defendant that the original $100,000 had to be forfeited to him as a consequence of failing to complete the APS of May 16, 2013.

[9] The $100,000, held by Homelife (who take no position on this motion) is the subject of dispute at this hearing.

Position of the Parties

[10] The Plaintiff requests summary judgment in this matter and asks for an order that the $100,000 held in trust by Bayview Homes be released to him.

[11] The basis for the Plaintiff’s claim is that:

1. The Defendant breached the APS by failing to complete the purchase of the Property; and

2. The deposit paid by the Defendant was always recognized by both parties as being a form of penalty to be forfeited in the event of non-completion of the transaction by the Defendant.

[12] According to the Plaintiff, there is no genuine issue requiring a trial to determine his claim.

[13] The Defendant resists the motion for summary judgment on the grounds that:

1. There was no breach of the APS;

2. There were misrepresentations made by the Plaintiff with respect to the potential construction of an underground parking lot;

3. The $100,000 deposit was not a penalty clause but a part payment of the original fee for the Property and as such, once the sale was not completed, it should have been returned.

4. Even if there were to be forfeiture, the Defendant could seek relief against forfeiture on the grounds that the Plaintiff suffered no loss or damage and that the total sum to be forfeited amounts to an “unconscionable loss”.

[14] According to the Defendant, these grounds raise a genuine issue requiring a trial and the motion for summary judgment should be dismissed.

The Test for Summary Judgment

[15] Rule 20.04(2)(a) of the Rules of Civil Procedure states that:

(2) The court shall grant summary judgment if,

(a) the court is satisfied that there is no genuine issue requiring a trial with respect to a claim or defence; or

(b) the parties agree to have all or part of the claim determined by a summary judgment and the court is satisfied that it is appropriate to grant summary judgment.

(2.1) In determining under clause (2) (a) whether there is a genuine issue requiring a trial, the court shall consider the evidence submitted by the parties and, if the determination is being made by a judge, the judge may exercise any of the following powers for the purpose, unless it is in the interest of justice for such powers to be exercised only at a trial:

1. Weighing the evidence.

2. Evaluating the credibility of a deponent.

3. Drawing any reasonable inference from the evidence.

[16] In the watershed case of Hyrniak v. Maudlin, 2014 SCC 7, 2014 1 S.C.R. 87, the Supreme Court of Canada concluded that summary judgment motions must be granted whenever there is “no genuine issue requiring a trial”. Writing for a unanimous court, Karakatsanis J., indicated that the test under Rule 20.04 would be satisfied if the judge could reach “a fair and just determination on the merits of a motion for summary judgment.”

[17] When faced with a summary judgment motion the court must determine whether the process:

(1) Allows the judge to make the necessary finding of fact

(2) Allows the judge to apply the law to the facts and

(3) Is a proportionate, more expeditious and less expensive means to achieve a just result.

[18] In my view, the nature and breadth of documentary and discovery evidence available to the court on the motion, allows this court to properly decide the case on its merits on this motion. In other words, this is a case where there is no genuine issue which would require a trial.

THE ISSUES

The Issues to Be Determined

[19] Counsel, very helpfully at this hearing, conflated their arguments under the following headings:

1. Was there a breach of the Agreement of Purchase and Sale?

2. Was there a misrepresentation by the Plaintiff with respect to the availability of underground parking in the Property?

3. Was the $100,000 deposit a penalty or a part payment of the purchase price?

4. If the $100,000 was a penalty, should there be relief against forfeiture?

Issue 1 - Was There A Breach Of The Agreement Of Purchase And Sale?

[20] This issue, is the easiest to resolve. The APS clearly required the completion of the purchase by the Defendant of the Property. Both parties agree that the sale of the Property did not occur as the Defendant failed to pay the Plaintiff the purchase price that she had contracted to pay. Although the Defendant argued, on this motion, that there were many reasons as to why she may have been unable to comply with the agreement, that argument, of itself, concedes the breach.

[21] The APS was an unconditional agreement that required the Defendant to complete the purchase of the Property. Her failure to do so, for whatever reasons she may have had, constitutes a breach of the agreement and I find no genuine issue requiring a trial on this point.

Issue 2 - Did the Plaintiff Make Misrepresentations With Respect to the Parking Lot?

[22] The Defendant asserted that she was the victim of misrepresentations made regarding the ability to build an underground parking lot on the Property. Her purpose in buying the Property was to build a commercial medical centre on the land and therefore an underground lot was essential. According to her affidavit and discovery evidence, she was reassured that the property was suitable for such a feature. Since those representations were untrue, the Defendant was released from her obligations under the contract as soon as the true state affairs came to light. The Plaintiff counters with the fact that if any misrepresentations were made they were made by the Defendant’s agent and not the Plaintiff. Accordingly, the Defendant cannot rely on those representations to breach the APS.

[23] I am satisfied that if any such representations were made, they were not made by the Plaintiff. The evidence clearly discloses that:

1. The Plaintiff and the Defendant did not have any direct contact with each other until after the APS had been signed;

2. The Defendant in both her discovery testimony and affidavit made it clear that it was her agent that had told her that there would be no difficulties in constructing an underground lot on the Property;

3. There were no terms or conditions in the contract relating to the purchase of the Property being conditional on the availability of zoning and construction of an underground lot;

4. The agent reviewed the offer with the Plaintiff before she signed it;

5. In trying to cancel the APS, the Defendant’s lawyers initially claimed duress and undue influence as a reason for backing out of the deal. Although that reason was later denied, there was no reference to any misrepresentations made by the Plaintiff;

6. Upon meeting the Plaintiff, the Defendant was shown plans for the Property which only revealed a parking capability above ground. It would be difficult to understand why the Plaintiff would have shown her these plans if he had misrepresented the situation regarding underground parking.

[24] In light of the above points, there is no genuine issue that requires a trial on this point.

[25] The Defendant concedes that the available evidence discloses only that she was given assurances about underground parking by her agent. However, the Defendant goes on to speculatively suggest that the agent’s information must have come from either the Plaintiff or the Plaintiff’s agent. This, he says, raises the genuine issue requiring a trial. I disagree. It is the Plaintiff’s onus to establish that the misrepresentations were made by the Defendant. She has not done so in any manner. There is nothing in the evidence that indicates the Plaintiff made any of the misrepresentations now relied upon. In fact, as stated above, the evidence clearly indicates the contrary. Had there been a suggestion that her agent had obtained his information from the Plaintiff or his agent, I would expect an affidavit outlining the details of when and how this information was imparted. However, as the Plaintiff points out, there is no affidavit whatsoever from the Plaintiff’s agent and no explanation as to why none was provided.

[26] It may well have been that the reason for attempting to withdraw from the APS arose when the Plaintiff disclosed his prior plans for the Property to the Defendant and she realized that an underground parking lot was not feasible. However, in my view, it is clear that her misunderstanding was not caused by any misrepresentations made by the Plaintiff.

[27] In any event, the APS contained an “entire agreement” clause which restricted any terms or conditions to those contained within the APS. Had any oral conditions based on the misrepresentations been made, they would not have been part of the APS and therefore of no effect. See, for example, Moon v. Ottawa 2014 ONSC 6503.

[28] Further, in a supplementary argument, the Plaintiff raises the principle of caveat emptor as applying in this case. Since I have already concluded that no misrepresentations were made by the Plaintiff, I need not address and resolve this point.

Issue 3 - Was the Deposit of $100,000 Intended to be Forfeited?

a) The Position of the Parties

[29] The Plaintiff submits that the Defendant always knew that the $100,000 was liable to forfeiture. Based on the construction of the APS, the use of the word “deposit” and the omission of any contractual term relating to forfeiture, both parties knew that the money would be paid to the Plaintiff if the Defendant defaulted. The Plaintiff also argues that the “entire agreement” clause found within the APS means that only the actual terms contained within the APS govern the contract.

[30] The Defendant, on the other hand, argues that the intention to use the $100,000 as part payment can be evidenced from the events subsequent to the failure to complete and the new offers and counter offers that took place between the parties. According to him, the Plaintiff’s requirement that the Defendant provide a “further deposit” demonstrates that the original deposit was merely an initial component of the total purchase price.

b) General Principles

[31] Where a transaction involving the sale of land does not close due to the default by a purchaser, the vendor is entitled to the payment of the deposit amount, without having to first prove actual damages: De Palma v. The Runnymede Iron & Steel Company, [1949] O.J. No. 495 (C.A.); Signal Chemicals Ltd. v. Dew Man Marine Trade Inc. 2011 ONSC 3951.

[32] In De Palma, supra, at para. 33, the Court of Appeal for Ontario suggested that the intention of the parties was an important factor in distinguishing between an advanced payment which was part payment or a deposit to be forfeited in the event on non-completion of a transaction. However, in Pleasant Developments Inc. v. Iyer, 2006 CanLII 10223 (ON SCDC), [2006] O.J. No. 1319 (S.C.J.), Brown J. indicated, at para. 8, that whilst not determinative, the use of the word “deposit” implied that the payment was intended to be forfeited in the event of the purchaser’s breach.

[33] In Tang v. Zhang, 2013 BCCA 52, the British Columbia Court of Appeal, reviewed the case law dealing with deposits in the sale of land cases and, at para. 30, summarized its conclusions in the following five points:

1. On a general level, the question of whether a deposit or other payment made to a seller in advance of the completion of a purchase is forfeited to the seller upon the buyer's repudiation of the contract, is a matter of contractual intention;

2. Where the parties use the word "deposit" to describe such a payment, that word should, in the absence of a contrary provision, be given its normal meaning in law;

3. A true deposit is an ancient invention of the law designed to motivate contracting parties to carry through with their bargains. Consistent with its purpose, a deposit is generally forfeited by a buyer who repudiates the contract, and is not dependent on proof of damages by the other party. If the contract is performed, the deposit is applied to the purchase price;

4. The deposit constitutes an exception to the usual rule that a sum subject to forfeiture on the breach of a contract is an unlawful penalty unless it represents a genuine pre-estimate of damages. However, where the deposit is of such an amount that the seller's retention of it would be penal or unconscionable, the court may relieve against forfeiture, as codified by the Law and Equity Act;

5. A contractual term that a deposit will be forfeited "on account of damages" on the buyer's failure to complete does not alter the nature of a deposit, but may be construed to mean that if damages are proven, the deposit will be applied against ("on account of") them. If no damages are shown, the deposit is nevertheless forfeitable, subject always to the expression of a contrary intention.

c) Analysis

[34] Counsel for the Defendant, in able submissions, seeks to distinguish the British Columbia case law by asserting that a forfeiture clause is a standard provision in sale of land agreements in British Columbia. The existence of such a clause, he argues, produces a more restrictive approach to the question of deposits in land purchases than the APS in the instant case which is silent on the issue of forfeiture.

[35] I reject this submission. The Ontario common law, as illustrated by Pleasant Development, appears to be even more restrictive than that of British Columbia and is not confined to cases containing a forfeiture clause.

[36] I turn next to the Defendant’s argument that, unlike the situation in the other forfeiture cases cited (for instance, DePalma) both parties in this case were not sophisticated business people. The Defendant’s submissions focus on the inequality of the relationship between the parties as the Plaintiff was a licensed real estate agent whereas the Defendant was an inexperienced purchaser. I find this to be an irrelevant fact as it is undisputed that the Plaintiff dealt with the Defendant’s agent, and not the Defendant, when drawing up the APS.

[37] In light of the above cases, the proper approach, in my view, is to examine the parties’ intentions when making the agreement by identifying any provisions which pertain to the payment in the event of non-completion. In the absence of any such provisions, the use of the word “deposit” would strongly imply that the purchaser envisaged that the payment would be forfeited if the purchase of land failed to complete through the purchaser’s fault. Any extrinsic evidence could also be taken into account when determining the intention of the parties when making the agreement. I would also have to take into account the fact that the APS contained an “entire agreement” clause to emphasize the supremacy of the written terms.

[38] In the instant case, the APS is silent on the forfeiture of the payment in the event of the Defendant’s default of purchase. The word “deposit” is used when describing the payment in the APS. Any doubts to the Defendant’s understanding of the payment can be resolved by an examination of her Discovery evidence taken on June 6, 2014 when the Defendant testified to her motives in making a new offer to the Plaintiff on February 19, 2014. She stated that she was advised that it was “better to close the deal”. When it was put to her that she understood she was making a “new” offer, the following exchange took place:

Q. There’s no deal that’s alive. You’re starting a new offer here?

A. Because I wanted to save that 100,00. That $100,000. I worked hard for that. I was pregnant. I was doing night shifts. I wanted to save some of the hundred thousand so I was told to - the only way to save that $100,000 is to just close the deal.

[39] The Defendant’s evidence indicates that, at the time of the new offer, she knew that the money was to be forfeited if she failed to complete the purchase of the property. The following factors are of significance:

(1) the lack of a provision dealing with non-completion,

(2) the use of the term “deposit” in the APS,

(3) the “entire agreement” clause contained in the APS,

(4) the fact that the Defendant made a new offer in order to “save the $100,000”, and

(5) the Plaintiff’s refusal to countenance the $100,000 as being part of the offer made on February, 19, 2014.

[40] These factors indicate that the intention of the parties was, at the outset of the agreement, to treat the $100,000 as a deposit subject to forfeiture in the event of default by the Defendant. Again, I find that this issue is not a genuine issue requiring a trial.

Issue 4 – Should the Defendant be Granted Relief Against Forfeiture?

[41] Finally, the Defendant argues that if this court finds the deposit is subject to forfeiture, relief should be granted to reduce the amount payable to the Plaintiff. According to the Defendant, the amount claimed, $100,000, is unconscionable and should be drastically reduced.

[42] In the Pleasant Developments case, supra, Brown J. stated at para 12,:

I accept that there are circumstances where the loss of a deposit may be subject to relief from forfeiture. If there is relief, the deposit is returnable, in whole or in part, to the defaulting purchaser. If the Court regards the forfeiture of the deposit as a penalty, then regardless of the wording of the contract, the Court retains the power to relieve the penalty. See Perell v. Engell, supra, at p. 187.

[43] The courts will award relief from forfeiture of the purchaser's deposit only where it is established that the sum is out of all proportion to the losses suffered and that it would be unconscionable for the vendor to retain the money. See Stockloser v. Johnson, [1954] 1 Q.B. 476. Where these requirements are not made out, the Courts will allow the forfeiture of the deposit without an inquiry into the extent of the vendor's damages. See Craig v. Mohawk Metal Ltd., 1975 CanLII 1172 (ON SC), [1975] 61 D.L.R. (3d) 588 (Ont. H.C.J.).

[44] Most significantly, in Pleasant Developments, Brown J. remarked, at para. 14:

The onus is on the party seeking to invalidate a clause to show that it inflicts a penalty, rather than determines the damages payable by the guilty party. But even where a clause does inflict a penalty, it will not always be unenforceable where, for example, it is not unconscionable.

[45] Accordingly, the onus is on the Defendant to demonstrate that the forfeiture of the deposit is a penalty rather than a payment of damages by the Plaintiff. Even if the Defendant could demonstrate that fact, this court would only grant relief if the amount was unconscionable.

[46] Both parties agree that the payment amounts to 6.67% of the total price ($1,300,000) agreed for the Property. By way of comparison, I note that in Amiri v. One West Holdings Ltd, 2013 BCCA 155, the British Columbia Court of Appeal, applying Tang v. Zang, found that a deposit equaling 25% of the total purchase price was subject to forfeit as a result of the purchaser failing to complete his agreement with the vendor and that forfeiture in that case was not “unconscionable” (at para. 33).

[47] Whilst the amount in dispute is a sizeable figure, it does not approach being “unconscionable”.

[48] In light of these findings, I am not persuaded to order relief against forfeiture in this case.

CONCLUSION

[49] As a result of my findings, the summary judgment motion is granted in favour of the Plaintiff, and an order shall issue that:

1. The deposit of $100,000 is forfeited to the Plaintiff;

2. Homelife Inc., shall release the $100,000 from its trust account and transfer it to the Plaintiff within 7 days; and

3. Costs in the sum of $6,000 shall be paid by the Defendant to the Plaintiff within 30 days.[^2]

Akhtar, J.

Date: February 17, 2015

[^1]: Examination for Discovery of Arkadi Mikhalenia, June 6, 2014, p. 105, Q. 620

[^2]: At the conclusion of the hearing, and prior to this judgment being issued, the parties both agreed that costs in the amount of $6,000 should be paid by the unsuccessful party.