Overview

Shouldn’t common sense and public policy make a condo developer liable for breaching key terms of an agreement? Not if the agreement excluded that liability, according to Ritchie v Castlepoint.

This case arises from a common trend in the condo market where once seemingly profitable developments start to lose their financial lustre several years into a lengthy approvals process and rising construction costs. Some developers respond to this quagmire by dropping the development and terminating agreements of purchase and sale with hundreds of purchasers who, just when they planned to be moving into a shiny new condo, are thrown back into the harsh reality of the housing market.

The Facts

In the spring of 2016, each of the plaintiffs in Ritchie had entered into an Agreement of Purchase and Sale with Castlepoint Greybrook Sterling Inc., a condominium developer. The Agreement incorporated the Tarion Addendum, which included two provisions that required Castlepoint to “take all reasonable steps to complete construction of the Building” and to “take all commercially reasonable steps within its power” to obtain satisfactory construction financing (the “Tarion Provisions”). 

In October 2017, Castlepoint announced that it was cancelling the project and terminating all 179 Agreements because it will not obtain the required municipal approvals and that the “now untenable project timetable has rendered the project commercially un-financable”.

Summary of the Proceedings

The Plaintiffs commenced a proposed class action to recover their losses from this termination. Since condo values increased since they entered the Agreement, they sought the difference between what they would have paid under the Agreement and the present value of a similar condo.

Castlepoint brought a motion for summary judgment on the basis that an exclusion clause in the Agreement absolved it from liability. The Court agreed with Castlepoint and dismissed the action.

The Court’s Reasoning

Castlepoint agreed, for the purposes of this motion, that it had breached the Agreement, but it argued that even so, Clause 28 of the APS completely absolved it from liability.

Clause 28 provides as follows:

Termination

In the event that this Agreement is terminated through no fault of the Purchaser, the Deposit shall be returned to the Purchaser (with interest, if any, calculated at the rate prescribed by the Condominium Act) and without deduction (except as contemplated by the Occupancy Licence). The Purchaser acknowledges that the Vendor shall not be required to return any amount paid by the Purchaser to the Vendor as Occupancy Licence Fees. The Purchaser further acknowledges that the Vendor shall not be liable for any damages or costs whatsoever incurred by the Purchaser resulting from the termination of this Agreement including, without limiting the generality of the foregoing, relocation costs, professional fees and disbursements, opportunity costs, loss of bargain or any other damages or costs incurred by the Purchaser, directly or indirectly. The Purchaser acknowledges and agrees that this provision may be pleaded by the Vendor as a complete defence to any claim which may be made by the Purchaser against the Vendor. [emphasis added]

The Plaintiffs’ two main arguments were:

1. That the Plaintiffs could not have both agreed that Castlepoint will take all commercially reasonable steps to obtain financing and construct the building and that Castlepoint will have no liability if it breached those terms, and;
   
   
2. Clause 28 is not enforceable because it is contrary to the public policy expressed by the legislative regime, and by the Tarion Addendum, which requires a developer to take all commercially reasonable steps to fulfill a financing condition construct a building.

• The Fundamental Breach Argument

Justice Perell called the Plaintiffs’ first argument a reprise of “the discarded fundamental breach argument”, which provided that an exclusion clause will not absolve liability for a breach that went to the “root of the contract” and deprived the innocent party  of “substantially the whole benefit of the bargain”.

Justice Perell pointed out that the fundamental breach is no longer law in Canada and that the current approach to exclusion clauses is outlined in the Supreme Court of Canada’s 2010 decision in Tercon Contractors Ltd. V. British Columbia (Minister of Transportation & Highways). According to Tercon, an exclusion clause will be enforceable if it 1) applies in the circumstances; 2) is not unconscionable; and 3) is not contrary to public policy.

Justice Perell agreed that the fundamental breach argument “responded to the common sense notion” that it cannot be fair that a contracting party would make a fundamental promise while simultaneously securing the right to have no liability for a breach of that promise. However, he stated that Canadian law perceives exclusion clauses, like all other contractual provisions, as “a matter of freedom of contract” in which the parties are free to allocate amongst themselves “the benefits and burdens and the risks of contracting.” He concluded that “if the language is clear, then an exculpatory provision can apply to a breach of any of the terms of the contract, including a fundamental term.”

• The Public Policy Argument

Addressing the Plaintiffs’ second argument, the Court found that Clause 28 met the Tercon test because it applied in the circumstances and because it was not contrary to public policy. Justice Perell essentially found that there was no public policy that required developers to try to obtain financing and complete their developments.

He found that the public policy in the Tarion Addendum was to allow the parties to contract freely but to ensure that, at a minimum, if the developer chooses to terminate, the purchasers will receive their deposits with interest from the date they were paid to the developer. Justice Perell further noted that nothing in the Tarion Addendum “prevents the parties from entering into other termination agreements” or precludes the developer from “limiting its liability to exclude damages incidental on the termination of the contract.”

Finally, the Court dismissed the argument that Clause 28 renders Castlepoint’s obligations under the Tarion Provisions meaningless. Justice Perell stated that Castlepoint continues to have those obligations and, despite Clause 28, the Plaintiffs were still left with the remedy of rescission for anticipatory breach of the Agreement, which, he found, “is a fair and reasonable remedy” given the fluidity of the real estate market. He rejected the Plaintiffs’ argument that they “have missed the benefit of the bargain of buying early in a rising market” because he found that it was just as likely that the value of condominium units would drop, rather than rise as they did in this case, which would have significantly changed the calculation of damages. 

Take away

This case confirms that the fundamental breach argument will not apply even in what appears to be an obviously unfair situation of a developer breaking core promises to hundreds of condo purchasers. Thus, anyone considering entering into a pre-construction agreement of purchase and sale should be aware of that risk and comfortable with the remedies that they will have in the event of a termination. However, condominium developers should carefully monitor the public policy surrounding residential real estate development, as expressed by future courts or the legislature, because that might tip the scales in favour of purchasers in a future case.