COURT FILE NO.: CV-15-520519

DATE: 20151207

SUPERIOR COURT OF JUSTICE – ONTARIO

RE: FREED (YORKVILLE) LTD., Plaintiff

AND:

HIGH VALUE CONSULTANTS LIMITED, Defendant

BEFORE: Stinson J.

COUNSEL: Harvin D. Pitch and Adam Brunswick, for the Plaintiff

Michael R. Kestenberg and Aaron Hershtal, for the Defendant

HEARD at Toronto: November 19, 2015

ENDORSEMENT

[1] This is a motion for summary judgment by the plaintiff, Freed (Yorkville) Ltd. ("Purchaser") against the defendant, High Value Consultants Limited ("Vendor") for the return of deposits paid pursuant to an abortive real estate transaction (the "Transaction"). Vendor has brought a cross-motion for summary judgment to dismiss the action and for a declaration that it is entitled to retain the deposits. Both motions rely upon the same records and cross-examinations. The parties agree that this is a suitable case for determination by summary judgment. At issue is whether the deposits paid in the course of the Transaction are the property of Vendor or whether, by reason of the circumstances under which the deal failed to close, they are refundable to Purchaser.

Facts

[2] In October 2012, Vendor and Purchaser (via an assignment from Re-Dev Corporation) entered into an Agreement of Purchase and Sale (“APS”) for Purchaser to purchase from Vendor the property at 388 and 390 Dupont Street, Toronto, Ontario ("Property"). The APS was amended five times over the following two years with a final closing date set for July 25, 2014 (“Closing Date”).

[3] Vendor agreed to sell the Property to Purchaser for $9 million. The APS as amended provided for four sequential deposits, totalling $1.2 million. These deposits were said to vest in favour of Vendor upon the waiving of a series of conditions by Purchaser. On February 14, 2014, Purchaser waived the final conditions making the APS final and binding, and the last of the deposits vested in favour of Vendor.

[4] As part of the APS, Vendor agreed to provide a $4.5 million dollar vendor take back mortgage to Purchaser on closing ("VTB"). The APS contained several important clauses concerning the VTB, as follows. First, the VTB was to include a proviso that in the event Purchaser defaulted in paying interest or principal under the VTB for certain specified periods of time (32 and 30 days respectively, from the date they were due) Vendor could register a deed (which in the interim would be held by its solicitor in escrow) transferring the Property back to Vendor (“Escrow Deed Provision”).

[5] A second clause related to secondary financing on the Property. The APS initially contained a blanket prohibition on secondary financing. The third amending agreement modified this restriction to permit secondary financing on the following terms:

no secondary financing shall be allowed on the Property, save and except in the event such lender under such financing agrees to subordinate its rights (including a standstill) in favour of the Vendor's rights under the VTB. ("Secondary Financing Amendment")

[6] It is worth observing at this stage that, quite apart from the foregoing provision, any secondary financing would inevitably have been subordinate to the VTB, since it would have been registered after, and therefore rank in priority below, the VTB. This suggests that the requirement that the secondary lender “agree to subordinate its rights … in favour of the Vendor’s rights under the VTB” was intended to connote something more than would arise in the ordinary course from subsequent registration.

[7] Finally, the APS contained a so-called “escalator clause” pursuant to which the purchase price of the Property and, correspondingly, the amount of the VTB, would be increased retroactively based on a formula applied to the subsequent sale price of adjacent properties (“Escalator Clause”).

[8] Purchaser initially sought secondary financing from a secondary lender and obtained a commitment in March of 2014. However, according to Purchaser’s evidence, that lender refused to fund (although there is no evidence concerning when that event occurred). Purchaser began to seek financing from Rompsen Investment Corporation (a lender with whom it had a ten year relationship) in the third week of July 2014, the week before the Closing Date.

[9] Purchaser received a financing proposal from Romspen on July 22, 2014, three days prior to the Closing Date. Romspen provided a formal commitment on July 24, 2014 ("Romspen Commitment"), the day before the Closing Date. Although it was not disclosed to Vendor at the time, the total amount of the proposed second mortgage was to be $6,220,000; it was to be registered over three properties (the Property and two adjacent parcels that Purchaser was purchasing from others); it would be collaterally secured; and it was to have no right of partial discharge.

[10] During the week of the Closing Date, Purchaser’s lawyers told Vendor’s lawyers that Purchaser had secured secondary financing and that the secondary financing documents were in the process of preparation, including a standstill agreement. The draft documents were not forwarded to the lawyers for Vendor until midnight on the day before the Closing Date; a revised draft of the proposed subordination and standstill agreement (“Draft SASA”) was forwarded at 10:01 A.M. the day before the Closing Date. The purpose of the Draft SASA was to address the relationship between Vendor as first mortgagee and Romspen as the subsequent encumbrancer in the event of default under either mortgage.

[11] An issue developed between the parties and their lawyers concerning the terms of the Draft SASA. Specifically, the Draft SASA contained the following language:

in the event that the Prior Lender [Vendor] acquires ownership of the Property pursuant to any agreement between the Borrower [Purchaser] and the Prior Lender ........the Property shall remain subject to the Subsequent Security [the second mortgage] to the extent of all indebtedness due thereunder to the Subsequent Lender [Romspen].

Thus the Draft SASA, required Vendor to acknowledge that, in the event it were to re-acquire the Property utilizing the Escrow Deed Provision, the Property would be re-acquired subject to Romspen's mortgage interest. Vendor’s position was that this requirement was contrary to the Secondary Financing Amendment, which expressly required any secondary lender to subordinate its rights in favour of Vendor's rights under the VTB; in other words, Vendor objected because instead of re-acquiring the Property free and clear (as provided in the Escrow Deed Provision) the Draft SASA would mean that any transfer back to Vendor would be subject to the second mortgage which would defeat the proviso that the secondary financing be subject to the Vendor’s rights, including the right to reacquire clear title.

[12] The Draft SASA contained many blanks and did not contain many significant terms of the proposed secondary financing, including the amount of the proposed secondary financing; the amount of the total encumbrance to be registered on the Property; the interest rate for the proposed secondary financing; the monthly payments associated with the secondary financing; and the maturity date of the secondary financing. The Draft SASA also failed to address the rights of Vendor under the Escalator Clause to increase the size of its first mortgage. Instead, it purported to cap the amount of Vendor's priority claim over Romspen's position at the face amount of the VTB and thus would have prevented the increase in the amount of the purchase price from being added to the VTB.

[13] Discussions among the lawyers regarding the correct interpretation of the Secondary Financing Amendment and the appropriate terms of the Draft SASA continued into July 25. Vendor attempted to accommodate Purchaser by proposing alternative terms that Vendor thought would protect its security and enable Purchaser to obtain its secondary financing, but no resolution was reached. Purchaser’s lawyer suggested that the parties agree to extend the closing in order to resolve the outstanding issues. Vendor was not willing to extend closing yet again.

[14] Since the APS and its amendments specifically provided that time was to remain “of the essence", Vendor’s lawyer tendered its closing documents on Purchaser's lawyer at 4:25p.m. on July 25, 2014. The Transaction did not close. Vendor took the position that Purchaser was in breach and it retained the deposits. Ultimately, Purchaser accepted that the Transaction was at an end due to the fault of Vendor, and it commenced this action seeking repayment of the deposits.

Issues and Analysis

[15] The basic issue in this case is whether Vendor or Purchaser breached the APS. Vendor says that Purchaser breached the APS by failing to close in response to the Vendor’s tender, and therefore the deposits stay with Vendor. Purchaser also argues that, under the terms of the APS, the deposits were to vest in Purchaser whether or not the Transaction closed, and regardless of the reason for non-completion.

[16] Purchaser says that Vendor wrongly refused to comply with the Secondary Financing Amendment by insisting on untenable and unintended terms in the Draft SASA, thus preventing Purchaser from putting its secondary financing into place. Since Vendor was in breach, the deposits should be returned. Purchaser also says that Vendor, in breach of its obligation to assist in the performance of the contract in good faith, wrongly declined Purchaser's reasonable request to extend the time for closing. Purchaser further asserts that Vendor's requirement for Purchaser to deliver an escrow deed and to eliminate the opportunity to redeem was a clog on the equity of redemption and therefore unlawful and impermissible.

[17] Before turning to an analysis of the parties’ respective positions, I note several significant facts that bear upon my analysis. Firstly, both Vendor and Purchaser are highly sophisticated and very experienced participants in the Toronto real estate market. They engaged in detailed negotiations and re-negotiations of their deal, over an extended period of time. Each side was advised throughout by able real estate counsel. There can be no question but that each fully understood the import and effect of the terms to which they agreed.

[18] Secondly, under the original terms of the APS, the security under the VTB for which the parties bargained contained several additional and specific protections for Vendor, including the Escalator Clause and the Escrow Deed Provision, as well as the prohibition against secondary financing. Each of these terms constituted a significant feature of Vendor’s security. The Escrow Deed Provision permitted Vendor (in the event of Purchaser's failure to pay interest or principal for specified periods of time following the due date for their payment) to re-acquire the Property in a summary fashion, without the need to go through a formal foreclosure process.

[19] The Escalator Clause provided the mechanism by which Vendor would be able to enforce its claim for the agreed-upon increase in the purchase price.

[20] The prohibition against secondary financing was a further important element of the security for which the Vendor bargained: it limited the additional debt that Purchaser could take on, to the potential detriment of its ability to pay sums due on the VTB. Cash flow prospects of a borrower are a legitimate and important consideration for a lender.

[21] When Vendor agreed to vary the prohibition against secondary financing, it did so under strict terms. Specifically, it agreed to permit such financing only where the secondary lender agreed to subordinate its rights in favour of Vendor's rights under the VTB.

[22] Purchaser now argues that it is unreasonable to interpret the Secondary Financing Amendment, and in particular the obligation of the secondary lender to subordinate its rights to the VTB, to include an obligation on the secondary lender to, in effect, accept that it will not be paid in the event the Escrow Deed Provision is invoked. Purchaser argues that this would lead to a commercial absurdity and that no lender would be prepared to agree to such a term.

[23] I do not accept that submission. First of all, as noted, both Vendor and Purchaser are highly sophisticated and experienced participants in the Toronto real estate market. As is apparent, Purchaser was engaged in a land assembly, which is reflected by the fact that the Romspen Commitment provided that it was to be registered over three properties and would also be collaterally secured. The mere fact that the VTB included the Escrow Deed Provision would not leave the second mortgagee without a remedy to collect its loan: it would merely have to look to the other security for which it had bargained, apart from the Property. Moreover, as I have previously noted, the express provision that required the secondary lender to subordinate its rights to the VTB suggests that the Secondary Financing Amendment was intended to confer more rights than would arise in the ordinary course from subsequent registration. This militates against the interpretation for which Purchaser contends.

[24] As well, the secondary lender could have cured any default by the purchaser under the VTB during the 30 or 32 day period, and thereby protected its interests. There is nothing to suggest that Vendor would not have agreed to a SASA that would have provided for Vendor to give notice to the secondary lender and an opportunity to protect its rights in the event of default by purchaser under the VTB; indeed, the evidence suggests that Vendor’s lawyer proposed such a term in connection with the discussions about the Draft SASA. What Vendor was not prepared to accept was an SASA that expressly deleted part of the security for which it had bargained, namely, the Escrow Deed Provision.

[25] I thus do not agree that the interpretation of the Secondary Financing Amendment advanced by Vendor is unreasonable. Rather, on a fair wording of its terms, I conclude that Vendor was not obliged to agree to any secondary financing that would in any way impair or limit the security for which it had bargained under the APS and VTB.

[26] In relation to Purchaser’s argument that the Escrow Deed Provision somehow amounted to a clog on the equity of redemption, I note that no issue was raised on this front until after the litigation was commenced, and certainly not when the APS was negotiated or the Draft SASA was discussed. In any event, Purchaser had a cure period in which to avoid the consequences of its default. As well, Vendor had, through its lawyer, indicated a willingness to include in the SASA an opportunity for the secondary lender to protect its rights in the event of default by purchaser under the VTB. And finally, regardless of the utilization of the Escrow Deed Provision, it would still remain open to Purchaser to seek relief from forfeiture, if the facts supported such a remedy.

[27] Of equal or greater importance is the fact that the Draft SASA proffered by Purchaser’s lawyer expressly limited Vendor’s security to the face amount of the VTB. This provision would have emasculated the Escalator Clause. As such, it was contrary to the terms of the Secondary Financing Amendment and was not something Vendor was required to accept.

[28] This was a case in which Vendor agreed to multiple extensions of the closing date. The final closing date was known to Purchaser well in advance, and thus Purchaser had ample opportunity to take the necessary steps to be ready to perform its obligations under the parties’ contract. Despite this fact, Purchaser left it until the last minute to firm up its secondary financing. Indeed, it was not until the day before closing that the Draft SASA was proffered to Vendor's lawyer. The terms were unacceptable for the reasons indicated, which in my view were fully warranted.

[29] The failure of Purchaser and its secondary lender to proffer an SASA and other terms of secondary financing that conformed with the APS, the VTB and the Secondary Financing Amendment, cannot be laid at the feet of Vendor. I cannot, in the circumstances, accept Purchaser’s submission that Vendor failed to conduct itself in good faith with a view to performing its obligations under the APS.

[30] Vendor’s obligation under the APS was to convey title on the Closing Date, in exchange for payment of the balance of the purchase price, as adjusted, after giving credit for the deposits and the amount of the VTB. Vendor was also obliged to cooperate in facilitating the closing by settling the necessary closing documents. Throughout the piece, Vendor evinced a willingness to perform its obligations and it tendered on Purchaser accordingly.

[31] Purchaser’s obligation under the APS was to tender the purchase price and a VTB compliant with the terms of the APS (including the Escrow Deed Provision) on the Closing Date. Purchaser was unprepared to do either. Instead, it sought an extension, in the face of the “time of the essence” clause in the APS. In my view, especially given that the urgency (if any) was created by Purchaser’s failure to arrange compliant secondary financing on a timely basis, Vendor was not obliged to comply with that request.

[32] I therefore conclude that Vendor met its obligations and that the Transaction failed to close due to the fault of Purchaser. I therefore reject Purchaser’s submission that Vendor should be required to disgorge the deposits, given that it was blameless. Deposits are ordinarily viewed as a guarantee of performance and a defaulting purchaser cannot seek their repayment as a matter of contract law or restitution. Even accepting there has been an enrichment on the part of Vendor at the expense of Purchaser – which, on the facts of this case, Vendor submitted there was not – there is a juridical reason to permit the enrichment, namely, the failure of Purchaser to perform its legal obligations.

Conclusion and Disposition

[33] For these reasons, the plaintiff’s motion for summary judgment is dismissed and that of the defendant is granted. Costs fixed and payable by the plaintiff to the defendant in the agreed-upon amount of $30,000, inclusive of fees, disbursements and applicable taxes.

Stinson J.

Date: December 7, 2015