COURT FILE NO.: CV-18-00606115

DATE: 20190927

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Xiao Kai Gao, Plaintiff

– AND –

Azhar Khan, Erum Khan and Re/Max Realtron Realty Inc., Defendants

BEFORE: Justice E.M. Morgan

COUNSEL: Matt Mulholland and Ayda A-Tabrizi, for the Plaintiff

Shahzad Siddiqui, for the Defendants, Azhar Khan and Erum Khan

HEARD: September 27, 2019

SUMMARY JUDGMENT

[1] The Defendants, Azhar Khan and Erum Khan (“the Khans”), move under Rule 20.01(3) of the Rules of Civil Procedure to dismiss the claim and for an Order releasing deposit funds paid by the Plaintiff, Xiao Kai Gao (“Gao”), and held by the Defendant, Re/Max Realtron Realty Inc. (“Re/Max”).

[2] On April 30, 2018, the Khans entered into an Agreement of Purchase and Sale with Gao to sell their property at 34 Harvest Moon Drive, Markham, Ontario (the “Property”) for $1,285,000 (the “Agreement”). The closing date under the Agreement was set for June 11, 2018.

[3] Gao was unable to arrange for financing and as a consequence defaulted on the purchase.

[4] Gao had paid a deposit on his purchase of the Property in the amount of $65,000. As indicated, the deposit is held by Re/Max, who takes no position on this motion. Counsel for the Khans submits that the $65,000 was a true deposit and that under the Agreement it is to be forfeited to the Khans upon default by Gao.

[5] Upon realizing that he would be unable to close, Gao attempted to negotiate a new deal with the Khans. He made a number of approaches to the Khans, ultimately offering to enter into a new agreement with a lower purchase price for the Property than that under the Agreement and, in addition, offered to forfeit $10,000 of the $65,000 deposit as a penalty for defaulting on the original Agreement. Under this offer, the balance of $55,000 of the deposit would be returned to Gao. The Khans rejected this offer of a new contract.

[6] Gao next advised the Khans that he was willing to pay an extra $40,000 on the purchase price of the Property. This offer was premised on Gao not forfeiting the original $65,000 deposit, but rather using it as a deposit on the new arrangement. The Khans declined this offer as well.

[7] The Khans proceeded to list the Property for sale. On July 19, 2018, the Khans entered into an agreement to sell the Property to another buyer for $1,280,000 – i.e. for $5,000 less than under the Agreement with Gao.

[8] Gao has sued Khan and seeks a declaration that Khan was in breach of the Agreement for failure to negotiate a new contract with him in good faith. He additionally contends that the Khans failed to mitigate their loss by not accepting his offer to replace the $65,000 deposit with a $40,000 penalty. Finally, Gao’s counsel submits that Gao is entitled to relief from forfeiture.

[9] As indicated at the outset, the Khans move for summary judgment dismissing the action and for an Order that the deposit funds be released to them. They are entitled to both heads of relief.

[10] The Khans did not breach the Agreement; Gao did. Under the Agreement, the deposit is forfeited to the Seller (i.e. the Khans) upon default of the Buyer (i.e. Gao). The Ontario Court of Appeal described this commonplace contractual arrangement most recently in Benedetto v 2453912 Ontario Inc., 2019 ONCA 149, at para 6, citing H.W. Liebig Co. v Leading Investments Ltd., 1986 CanLII 45 (SCC), [1986] 1 SCR 70, at 86-87:

The deposit stands as security for the purchaser’s performance of the contract. The prospect of its forfeiture provides an incentive for the purchaser to complete the purchase. Should the purchaser not complete, the forfeiture of the deposit compensates the vendor for lost opportunity in having taken the property off the market in the interim, as well as the loss in bargaining power resulting from the vendor having revealed to the market the price at which the vendor had been wiling to sell.

[11] That is precisely what happened here. Since Gao breached the Agreement, the Khans were entitled to the $65,000 deposit. Any analysis of the further negotiations between them with respect to a proposed new contract must keep in mind the Kahns’ entitlement as its starting point.

[12] Gao’s argument that the Khans did not negotiate with him in good faith has no legal basis and is unsupported by any evidence. What Gao appears to mean is that he was sincere in attempting to renegotiate and that he was very motivated to make a new deal. He expected the Khans to be equally motivated, and thus says that they should have accepted his offer to enter into a new agreement.

[13] There is nothing about the Khans’ response to Gao that breaches an obligation to contract in good faith. That obligation does not mean that a party must accept an offer for less money than they are seeking for their property. Gao offered $40,000 more for the Property in exchange for the Khans releasing $65,000 that was owed to them already. They were certainly within their rights to decline an offer that would have caused them a $25,000 loss. The Agreement was firm and was breached by Gao. It is not a sign of bad faith for a party with a firm contract of sale to be unenthusiastic about renegotiating the contract, or entering into a new contract with the same buyer, for a lesser amount.

[14] Gao’s position on mitigation is also without any legal basis. His counsel seems to suggest that if the Khans had accepted Gao’s offer to earn an extra $40,000 on the sale they would have suffered less of a loss than their current claim to the $65,000 deposit. With respect, that is not how mitigation works. A creditor who is owed $65,000 does not fail to “mitigate” by refusing an offer to be paid $40,000 by the debtor and to forgive the balance of the debt.

[15] The Khans did attempt to mitigate their loss by re-listing the Property and ultimately selling it for only $5,000 less than under the Agreement with Gao. They have not sued Gao for the $5,000 difference, but merely request that Re/Max be ordered to release to them the deposit funds to which they are entitled.

[16] Turning to Gao’s claim for relief from forfeiture, I note that since the Khans suffered a $5,000 loss on the re-sale of the Property, their failure to suffer any damages cannot be the ground on which Gao seeks such relief. In Redstone Enterprises Ltd. v Simple Technology Inc., 2017 ONCA 282, para 26, the Court of Appeal indicated that in those circumstances, absent a disproportionately large deposit or some finding of unconscionability there would be no grounds for relief from forfeiture. Neither of those situations is present here.

[17] In Redstone, a deposit in the range of 5% to 7% percent of the contract price was found to be within the realm of reasonableness: Ibid., para 28. The amount of the deposit here, roughly 5% of the price of the Property, is squarely within the range that the courts have deemed to be reasonable and proportionate.

[18] The Court also reasoned in Redstone that a finding of unconscionability “must be an exceptional one, strongly compelled on the facts”: Ibid., para 25. There is no evidence of any inequality of bargaining power, or oppression of Gao by the Khans, or any other badge of unconscionability.

[19] Neither the Khans nor Gao were real estate professionals or financial institutions, and there is no evidence that one was financially stronger than the other or in an advantageous position over the other; they were each private home sellers and buyers operating at arm’s length. Gao was a purchaser who failed to close, and there is nothing else to remove this from the many other cases of this nature. I can find no grounds on which to base a claim for relief from forfeiture.

[20] The action is dismissed.

[21] Re/Max shall pay the $65,000 held as a deposit in respect of the Agreement to the Khans.

[22] The Khans are entitled to their costs as against Gao. They seek $6,708.00 on a partial indemnity basis. Gao would seek $8,352.61 on a partial indemnity basis. Counsel for Gao takes no issue with the quantum of costs sought by the Khans, and neither’s request would take the other by surprise: Rule 57.01(1)(0.b).

[23] Gao shall pay the Khans costs in the all-inclusive amount of $6,708.00.

Date: September 27, 2019

Morgan J.