Court File and Parties

COURT FILE NO.: CV-16-565210 Original MOTION HEARD: 2017-07-17 TYPED REASONS RELEASED: 2017-07-19

SUPERIOR COURT OF JUSTICE – ONTARIO

BETWEEN:

2511899 ONTARIO INC. Plaintiff

and

2221465 ONTARIO INC. and 2518929 ONTARIO INC. Defendants

AND BETWEEN

2221465 ONTARIO INC. Plaintiff by Counterclaim

and

2511899 ONTARIO INC. and GLOBAL WEST REALTY LIMITED Defendants by Counterclaim

BEFORE: MASTER D. E. SHORT

COUNSEL: Jonathan L. Rosenstein, for the Plaintiff, 2511899 Ontario Inc. Shawn Tock, for the Defendant, 2221465 Ontario Inc. Stephen M. Turk, for the Defendant, 2518929 Ontario Inc.

Enhanced REASONS RELEASED: July 19, 2017

Oral Reasons for Endorsement re Security for Costs

[1] As it was some urgency to have a determination in this case, I delivered oral reasons at the conclusion of about three hours of argument.

[2] Following the delivery of my old ways, I advised counsel that I would provide these somewhat expanded reasons. It is hoped that what follows will provide a more specific outline of the determinations made by me and my ultimate decision.

I Certificate of Pending Litigation

[3] This case arises out of the aborted sale of a gasoline station in Brampton area. The plaintiff 2511899 Ontario Inc. (“899”) entered into an agreement of Purchase and Sale with 2221465 Ontario Inc. (“465”). A $100,000 deposit was part of the original Agreement of Purchase and Sale.

[4] That deal encountered difficulties with the result that the original closing date was postponed and an amended Agreement of Purchase and Sale was entered.

[5] Perhaps significantly the following deletion was incorporated in the Amended document:

Delete:

Offer is conditional upon the approval of the terms hereby the Buyer's Solicitor, unless the Buyer gives notice in writing delivered to the Seller personally or in accordance with any other provision of delivery or notice in this Agreement of Purchase and sale or any Schedule thereto not later than 5:00 PM within Ten (10) days of accepting this offer, that this condition is fulfilled, If buyer is not satisfied with the terms and condition of this Offer, then this offer shall be null and vold and the deposit shall be returned to the Buyer in full without deduction. This condition is included for the benefit of the Buyer and may be waived at the Buyer's sole option by notice in writing to the Seller as aforesaid within the time period stated herein. During this time Seller will provide approved Site Plan, Building Permit. Clean Phase II Environment Report, Property Tax Bill, Lease with the Existing Tenant and all other documents in the seller's possession to the buyer for: review.

Buyer and seller acknowledge and confirm that there is no financing condition in this offer. Buyer will provide $700,000 including the Initial and additional deposit. Seller will provide a VTB of $1,800,000 at 8% annual interest rate for one year fully open, paid monthly and interest only. All the interest will be paid at the maturity of this mortgage.

[6] The above was directly followed by these provisions:

Seller and buyer acknowledge that buyer will provide $700,000 in total as down payment. Seller will arrange the remaining as first mortgage, on third –party mortgagee conditions and as VTB combine totaling $2,800,000. VTB will be at 8% annual interest for one year fully open. Interest of VTB will be payable atthe maturity date.

[7] These responsibilities of the Vendor with respect to facilitating the purchase by the Purchaser may have a significant impact in considering the Purchaser’s difficulty in closing the transaction.

[8] That second agreement contemplated a further deposit of $100,000. However there is a disagreement in the evidence of the parties as to whether or not the payment of that second deposit was waived at some point.

[9] The plaintiff in this action was originally the Applicant in an Application for a Certificate of Pending Litigation. That matter came before Justice Gilmore on February 3, 2017. Because of the clear factual disputes Justice Gilmore turned the matter into an action and gave a brief endorsement.

[10] Part of that handwritten endorsement included a requirement that the status quo of the subject property shall be preserved. “That is, the property shall not be sold until further Court order [on?] the consent of the parties on the return date of the motion.”

II. The Second Sale

[11] The case history reflects that the Applicant 899, filed the Application for the CPL on December 2, 2016. It is clear to me that the vendor or was well aware that the application had been launched and that the parties were endeavouring to negotiate a settlement over the next month or so.

[12] In Ontario Superior Court Practice 2016 Justice Archibald and the other authors observe in a Practice Note under Section 103 of the Courts of Justice Act discuss the purpose and effect a CPL:

Certificates of pending litigation ("CPL") are designed to protect unregistered interests in land, as such interests could be defeated by conveyances to third parties without notice to the holder of the unregistered interest. The registration of a CPL is the means provided for P to protect his or her interests and to give notice to the other parties that P claims an interest in the property and was seeking to enforce his or her rights by action. Such registration operates as a notice to all parties who were or might become interested in the property, whether or not they carried out a search of title. From a purely legal point of view, the CPL creates no interest in land and merely serves as notice to non-parties of the claim asserted. In reality and as a practical matter, its effects are far greater…:.”[footnotes omitted, my emphasis]

[13] Here, apparently without any advice to the Applicant, 465 re-sold the property. That sale was to the defendant 2518929 Ontario Inc.(“929”) was at the same price 899 was willing to pay BUT now included a commitment to the granting of a “Vendor Takeback” mortgage for the entire purchase price, save $10,000. It is clear to me that the purchaser was well aware of the potential claims inasmuch as they sought and obtained an agreement to indemnify from the vendor. By way of a specific document signed prior to the closing.

[14] The Indemnity, with my emphasis added, read in part:

“IN CONSIDERATION of the closing or the above-noted transaction, the undersigned Vendor, with full power and authority to grant an indemnity valid and binding upon and enforceable against the undersigned in the terms hereinafter contained, hereby agrees to Indemnify and save harmless the Purchaser, against and in respect of any loss, damage, claim, action, suit, proceeding. deficiency or expense, including any and all out of pocket costs, including, without limitation, all reasonable legal and accounting fees relating to, arising from or in connection with any claim that 2511899 Ontario Inc. may have against the Purchaser arising from the Agreement of Purchase and Sale entered into between the Vendor and 2511899 Ontario Inc. for the sale by the Vendor to 2511899 Ontario Inc. of the property.”

[15] Thus we have a situation where the purchaser can look to the vendor in the event that the transaction in which it participated it somehow set aside or results in a liability on the part of 899.

[16] I have real difficulty with the way many of the elements involved in this transaction were carried out. Moreover, in many ways, I am unsure who is most at fault. In any event we are still at an early stage in the litigation. My colleague Master McAfee is scheduled to hear the motion for the certificate of pending litigation on September 7, 2017.

[17] In my view it would be premature to establish any quantum of security for costs of the entire main action until the results of that motion are finalized.

III. Status of Deposit

[18] With regard to the entitlement to the deposit counsel for 929 relied upon the decision of P.A. Daley J. Signal Chemicals Ltd. v. Dew Man Marine Trade Inc., 2011 ONSC 3951; 8 R.P.R. (5th) 151; 204 A.C.W.S. (3d) 660; 2011 CarswellOnt 5747.

[19] That case involved an Application by a vendor for a declaration permitting retention of purchaser's deposit which was allowed. However there no evidence was submitted on behalf of the purchaser and counsel acknowledged that the onus rested with the respondent to establish entitlement to relief from forfeiture. Counsel further acknowledged that by failing to close the transaction as scheduled, the respondent had breached the terms of the agreement of purchase and sale and the applicant, in these circumstances, had a prima facie a right to retain the deposit monies.

[20] In Justice Daley’s “Analysis” the applicable law is set out:

13 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: Baker v. Wynter at para. 34; De Palma v. The Runnymede Iron & Steel Company, [1950] O.R. 1 (C.A.) at p. 8.

14 Having acknowledged that the agreement of purchase and sale was breached and that the applicant was otherwise entitled to the deposit, the respondent seeks relief from forfeiture.

[21] I find the present case is quite different. There is no acknowledgment by the applicant of any default on its part. Moreover, the resale apparently was for the same purchase price. While I accept that it is not necessary to prove any damages, in appropriate circumstances, for the purchaser’s deposit to be forfeited, I simply do not believe on the available evidence at this point, that this is such a case.

[22] Ultimately I agree with my late and missed colleague Justice Echlin in his decision in Comonsents Inc. v. Hetherington Welch Design Ltd., 151 A.C.W.S. (3d) 834; 2006 CarswellOnt 6173. In that decision he included useful historical background, together with a conclusion involving the need to also respect to the courts equitable jurisdiction:

1 R.S. ECHLIN J.:— The practice of giving a sum of money to signify the formation of a contract is said to have originated in Phoenician times; passed through the Greeks to the Romans (where it was called arrha), then onto the current common law, and is now referred to as a "deposit" or "earnest money".

14 Rather, I find that the deposit paid in this instance was of the nature of "something which binds the contract and guarantees its performance ... If it is a deposit or both a deposit and prepayment, and the contract is rescinded, it is not returnable to the person who pre-paid it if the recission was due to his default (see: Gallagher v. Shilcock, [1949] 2 K.B. 765 at p. 768 (per Finnemore J.). This view has also been adopted by the Supreme Court of Canada in March Bros. v. Banton (1911), 45 S.C.R. 338 at p. 340.

15 One of the leading cases on the subject of deposits is Howe v. Smith (1884), 27 Ch.D. 89 (C.A.) in which Sir Edward Fry L.J. discussed at length the subject of deposits, earnest money and arrha. At p. 101, he stated: Money paid as a deposit must, I conceive, be paid on some terms implied or expressed. In this case no terms are expressed and we must therefore inquire what terms are to be implied. The terms most naturally to be implied appear to me in the case of money paid on the signing of a contract to be that in the event of the contract being performed it shall be brought into account, but if the contract is not performed by the payer it shall remain the property of the payee. It is not merely a part payment, but is then also an earnest to bind the bargain so entered into, and creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract.

16 While it is not necessary for the determination of this case, I reference in passing, the approach advocated by Sharpe, J.A. in Peachtree II Associates - Dallas L.P. v. 857487 Ontario Ltd. (2005), 76 O.R. (3d) 362 (C.A.) regarding to enforcement of stipulated remedy clause. Not every provision of a contract which provides that a sum be paid to the other in the event of a breach by the party making such payment is a penalty clause. Equitable relief from forfeiture is an inroad upon freedom of contract.

[23] In the present case, I believe it is premature and simply too early to establish the appropriate ultimate disposition of the deposit. However, the circumstances, I believe that it within the courts equitable jurisdiction to allow the deposit to serve a dual function.

IV. Interim Disposition

[24] I am prepared to deal with security for costs of the motion and the stages already encountered. In coming to my conclusion I have considered the caselaw put before me by counsel, and in particular, the decision of Charney J. in Proxema Limited, 2016 ONSC 5686 at paragraph 23.

[25] The issue between the parties is how to treat the $100,000 deposit that was original paid with respect to the now aborted real estate transaction.

[26] While somewhat unorthodox, I have determined to apply proportionality and to allocate $40,000 as security for the costs of 929 on the pending motion.

[27] Having heard the submissions of counsel. I have determined to similarly allocate $25,000 to security for the potential motion costs of 465.

[28] To clarify is my intention that costs awards in favour of the defendants may be funded from the purchasers, $100,000 original deposit, which is presently being held in trust.

[29] If Master McAfee awards costs of the CPL motion in favour of the plaintiff, those costs will simply be payable in the normal way, and she may direct.

[30] If my colleague finds there is a liability for costs owed by the plaintiff then those costs will be payable at this stage within 30 days of her award. If the awarded costs are not paid to the successful defendants, then the monies may be drawn from $40,000 and $25,000 amounts established about.

[31] With respect to going forward. In the matter, I determined that the hundred thousand dollars should be directed determined and treated as a next credit on account.

[32] If ultimately there is more payable in any particular stage, the then available balance of the $100,000 will be divided between the defendants treated as applicable on an equal basis.

V. Going Forward

[33] Subject to any judge giving alternate of alternative guidance, I will remain seized for the further steps in the establishment of the security for costs for the future steps in this action, once we know where the action is actually going.

[34] The rationale for security for costs is to provide a reasonable measure of protection for a party’s costs incurred. I believe that this arrangement does so.

[35] Considering the submissions of all the parties, for which I express my gratitude, I still feel that on balance, the plaintiff has been the more successful party on this motion and I am therefore awarding costs of this motion for security for costs to the plaintiff on a partial indemnity basis, in the cause of the CPL motion presently scheduled to be heard by Master McAfee.

Enhanced version Released: July 19, 2017

Master D. E. Short

DS/ 195