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On Pre-Construction Real Estate Disputes by our Occasional Counsel Peter Spiro

Cancelled Condo Projects and Arbitration versus Class Actions

Ritchie v. Castlepoint Greybrook Sterling Inc., 2020 ONSC 3840 (CanLII)by Peter S. Spiro

There have been news headlines in Ontario about major condominium construction projects being cancelled, leaving behind hundreds of disappointed buyers. The practice in the condominium industry is to sell the units in a project three or more years before the scheduled completion of construction. Buyers put down substantial deposits that lock them into that project. If it is cancelled two or three years later in a rising market, they will suffer large losses, because the cost of buying an alternative unit will be much higher.

In such situations, the buyers may attempt to group together to launch a class action against the developer. They have been unsuccessful in these attempts, as the class actions have failed to achieve certification by the courts.

The Agreement of Purchase and Sale (“APS”) in these projects is written in a way that is heavily stacked against the buyer, and that results in an inability to pursue a class action. However, I will point out below that there may sometimes be a different alternative, in the form of arbitration based on the Ontario New Home Warranties Plan Act, that can result in a damage award to buyers acting individually.

In the Ritchie v. Castlepoint case, the judge, Justice Perell, may have come to the right conclusion based on the law as it pertains to class actions, but I would respectfully submit that his analysis of the warranty provisions (a matter not properly before the court in any event) was flawed.

Ritchie v. Castlepoint

There was no material dispute about the facts in the case under discussion, Ritchie v. Castlepoint Greybrook Sterling Inc., 2020 ONSC 3840 (CanLII). In the spring of 2016, the defendant Castlepoint had sold 179 units in a condo project in Toronto’s Junction district. The target occupancy date was March 29, 2019. On October 23, 2017, Castlepoint sent letters to the buyers stating that the project was cancelled and it would be refunding their deposits. As observed by the judge:

[37] Castlepoint never did start construction. Castlepoint alleges that by the late summer and early fall of 2017, rising construction costs made the condominium financially unviable. Castlepoint’s financial projections indicated that the project would generate negative returns rather than the minimum level of profit required by project lenders to finance the construction of the condominium.

The buyers had their deposits locked into this project for a period of about 18 months. That happened to be a period of rapid price increases in Toronto’s condo real estate market. The average two-bedroom condo rose from about $440,000 in April of 2016 to about $590,000 in October of 2017.[1] Therefore, the purchaser of a cancelled unit had effectively lost about $150,000.

In ordinary business, when somebody enters into a contract, they are expected to carry through with their promises, barring extraordinary events such as natural disasters. To do otherwise is a breach of contract. The fact that the contracting party regrets the bargain because it now thinks it will be unprofitable is not a valid excuse. The party in breach must compensate the other party in monetary terms, e.g., for the loss of $150,000 per unit. That general principle is evaded by the contract used by the condo industry. They have a very thorough “exclusion clause” that is like the proverbial “get out of jail free card”. It states that under no circumstances is the buyer entitled to claim damages because the developer has terminated the contract.

The Exclusion Clause in the Condo Agreement of Purchase and Sale

An exclusion of liability clause, as its name implies, is a term that excludes liability under a contract if certain things happen. In most types of contracts that have such a clause, it relates to quite specific events, but in the standard condo developer’s Agreement of Purchase and Sale (“APS”) it is very broad and sweeping. It boldly states, in clause 28, that:

In the event that this Agreement is terminated through no fault of the Purchaser, the Deposit shall be returned to the Purchaser …. The Purchaser further acknowledges that theVendor shall not be liable for any damages or costs whatsoever incurred by the Purchaser resulting from the termination of this Agreement including…. 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 concept of an exclusion clause has a long history in Anglo-Canadian law. In the more distant past, Lord Denning, head of the Court of Appeal in England, propounded a doctrine that limited the scope of exclusion clauses. Based on Lord Denning’s doctrine, an exclusion clause that permitted a fundamental breach of the contract, which made the whole purpose of the contract a nullity, could not be enforced: “it cannot be fair that a contracting party could make a fundamental promise while simultaneously securing the right to have no liability in the event that he or she did not perform the fundamental promise.” Unfortunately for consumers, more conservative judges in the House of Lords later disavowed that doctrine, and this has been followed in Canada.

Justice Perell briefly surveyed the history of the legal approach to exclusion clauses. The leading case on this in Canada is the Supreme Court’s decision in Tercon Contractors Ltd. v. British Columbia (Minister of Transportation and Highways:

[53] In Tercon, discussed further below, the Supreme Court of Canada established a three-step approach to the application of exclusion clauses: (a) the first step is to determine whether as a matter of interpretation the exclusion clause applies to the circumstance of the case; (b) if the exclusion clause applies, the second step is to determine whether the clause was unconscionable at the time the agreement was made; and, (c) if the exclusion clause applies and it was not unconscionable, then the third step is to determine whether the court should refuse to enforce the cause because of the presence of an overriding public policy.

After conducting his analysis, Justice Perell concluded that the exclusion clause in this APS did not violate the Tercon principles and was therefore enforceable:

[90] Viewing the enforcement of Clause 28 as a matter of interpretation or considering its application or non-application as a matter of public policy, in my opinion, enforcing the clause is not contrary to the existence of an overriding public policy.

The Role of the Tarion Addendum from the Ontario New Home Warranties Plan Act

The Ontario New Home Warranties Plan Act (“ONHWPA”) is a consumer protection statute that aims to protect buyers both against physical defects in the construction and also against breaches related to the timing of completion. Regulation 273/04 under ONHWPA designates the Tarion Corporation as the administrator of the ONHWPA. Other regulations state that Tarion can specify various forms of “Addendum” that are to be mandatory additions to the APS for a new home purchase.

The Tarion Addendum requires the vendor to state the factors which will give it the right to terminate the agreement, such as the inability to obtain financing or zoning permission. If the vendor has made an honest effort to obtain financing, and has been unable to get it, the Addendum does allow it to terminate the agreement. The principles of contract interpretation imply that there must have been a good faith effort, and the vendor cannot get out of the agreement by merely pretending that it was unable to obtain financing and using it as an arbitrary excuse.

The role of the Tarion Addendum to the APS in Ritchie v. Castlepoint was raised by the plaintiffs, but quickly dismissed by Justice Perell, who decided that it did not make a difference in this case:

[83] Clause 28 is in some respects a codification of paragraph 11 of the Addendum, but if paragraph 11 is a different termination provision, it is was agreed to by the parties [sic] and the parties agreed that the Vendor shall not be liable for any damages or costs whatsoever incurred by the Purchaser resulting from the termination of this Agreement.

The important point that was not discussed here is that the Tarion Addendum has the power to override any provision in the APS, including the exclusion clause. Section 13 of the Addendum states:

13. Addendum Prevails

The Addendum forms part of the Purchase Agreement. The Vendor and Purchaser agree that they shall not include any provision In the Purchase Agreement or any amendment to the Purchase Agreement or any other document (or indirectly do so through replacement of the Purchase Agreement) that derogates from, conflicts with or is inconsistent with the provisions of this Addendum, except where this Addendum expressly permits the parties to agree or consent to an alternative arrangement. The provisions of this Addendum prevail over any such provision. [Emphasis added]

There is an additional provision in the Addendum stating that, if the vendor terminates the agreement, the purchaser who disputes the termination is entitled to seek arbitration. (Moreover, the vendor is required to pay for the costs of the arbitration.) There would be no point in having such a right to go to arbitration if the exclusion clause is a complete defence against paying damages, and therefore the exclusion clause is necessarily repudiated by the Tarion Addendum.

Developers appear to be aware of this. In one case in which the author participated, where the termination by the vendor was clearly without merit, the vendor made a substantial settlement payment to the purchaser in order to avoid the risk of going to arbitration.

Mandatory Arbitration under ONHWPA Precludes a Class Action

Section 17 of ONHWPA states that “every agreement between a vendor and prospective owner shall be deemed to contain a written agreement to submit present or future differences to arbitration,” and this requirement to go to arbitration is laid out in the Tarion Addendum.[2]

Therefore, while I would argue that the Tarion Addendum does confer rights that override the exclusion clause, this cannot be enforced in court. Therefore, a class action cannot be used to enforce the provisions of the Addendum.

ONHWPA explicitly ousts the jurisdiction of the courts in this area in favour of private arbitration. This usually takes place before a retired judge, whose fees are paid by the parties, at no expense to the government. Arbitration has some efficiency advantages, but one of the major downsides from the viewpoint of consumer protection is that arbitral decisions are not publicly reported. They do not create precedents, and consumers are often unaware of their right to make use of arbitration.

As the jurisdiction of the court is ousted, there cannot be a class proceeding, which must take place in court. There are a number of significant areas in which class proceedings are prevented by statutory provisions that mandate a different forum. For example, the Expropriations Act, RSO 1990, requires that claims for “injurious affection” (e.g., loss of business due to a major construction project blocking access) are required to be made before the Local Planning Appeals Tribunal. Therefore, when business owners sought damages for lost business due to construction of the streetcar right of way along St. Clair Avenue, their claim failed to achieve certification. That also happened to be a decision by Justice Perell, which was upheld by the Court of Appeal in Curactive Organic Skin Care Ltd. v. Ontario, 2012 ONCA 81 (CanLII):

[3] Contrary to the appellants’ assertion, the court’s jurisdiction can indeed be ousted in favour of an administrative tribunal through clear, explicit and unambiguous language in a statute…

Class actions are intended to provide access to justice where individual claims are too small to be feasible. Perhaps this is not so much a problem in the case of cancelled condo projects or expropriations, where the individual claims are more likely to be larger. Nevertheless, they are not always large enough to proceed individually, and a class action would often still be more efficient.

The pitfalls in this can be seen in British Columbia, where the principle of ousting the jurisdiction of the court has been taken to an extreme in the case of employment disputes. That province’s Employment Standards Act, RSBC 1996, provides that an employee whose rights (e.g., to overtime pay or vacation pay) have been violated shall complain to the Ministry of Labour. BC’s Court of Appeal has therefore ruled that no such claims can be brought by way of a class action: Macaraeg v. E Care Contact Centers Ltd., 2008 BCCA 182 (CanLII). Ontario’s Employment Standards Act is similar to BC’s, but Ontario’s Court of Appeal has nevertheless ruled that class actions are permissible for claims for unpaid overtime and vacation pay.

Conclusion

This case, and others before it, have found that plaintiffs face difficult challenges in bringing a claim of this type via a class action. Recent amendments to Ontario’s Class Proceedings Act in Bill 161, which raise the standards that must be met for certification, will only make things more difficult. In such a situation, individuals who have suffered losses may be well advised to pursue individual claims under the Tarion Addendum, which may offer a better chance at claiming damages for the lost opportunity from a cancelled condominium project.

Peter Spiro is the principal of Spiro Law P.C. He acts as occasional counsel to Goldstein Law in expropriation and real estate litigation. This article is provided for general information, and not intended to apply to any individual case. You should seek legal advice pertaining to the facts of your particular case.

[1] https://toronto.listing.ca/condo-price-history.htm

[2] This was a key issue in yet another of the prolific Justice Perell’s decisions, where he ruled that a class action could not be used because of a mandatory arbitration clause found in a private contract, Heller v. Uber Technologies Inc., 2018 ONSC 718 (CanLII), <http://canlii.ca/t/hq4hk>. In that case, the Court of Appeal ruled that the arbitration clause was unconscionable and therefore unenforceable, upheld by the Supreme Court in Uber Technologies Inc. v. Heller, 2020 SCC 16 (CanLII), <http://canlii.ca/t/j8dvf>.

Job Loss during COVID-19: Government Subsidies and Benefits

Many businesses and workers have suffered severed financial loss as a result of mandatory business closures resulting from COVID-19. Fortunately, the government of Canada and the province of Ontario have stepped up by introducing a number of programs to help alleviate the negative impact of the economic downturn. In this blog post we will highlight a few of the government programs designed to assist workers who have been impacted by the pandemic and also commercial landlords and tenants.

First, Am I Entitled to Notice or Severance from my Employer?
The Employment Standards Act (ESA) sets out the minimum obligations of employers following the termination of employment, including notice of termination (or pay in lieu thereof) and severance pay obligations. If you have an employment contract that does not specify that your “ESA entitlements represent your full entitlements on the without cause termination of your employment,” you may be entitled to common law notice, which provides for more generous notice requirements.

Whether or not you are entitled to common law notice is based on the terms of your employment contract; and the amount of such notice is dependent on each unique set of circumstances. Terminated employees often contact us advising that “they were the best employees” and they consistently received positive performance reviews. We often hear from terminated employees “how can my employer terminated me and then post a job opening for my former position right away?” These concerns are actually not relevant to the severance equation. As an employees can resign at any time for no reason, any employer can terminate an employee without cause at any time for no reason so long as it is not a discriminatory reason. As a result, your strong performance or the fact that your job may be replaced by another candidate, is not relevant in determining the severance calculation.

The more relevant factors in determining severance entitlements under the common law in Ontario, include but is not limited to: (i) the age of the employee at the date of dismissal – with employees of more advanced age typically entitled to greater notice periods; (ii) the duration of service in the employment, with longer-service employees entitled to more enhanced severance pay; (iii) the seniority or position of the employee, with greater notice periods being awarded to more senior employees with specialized positions; (iv) and the availability of similar employment. During COVID-19, the job market has frozen and it will be most challenging to secure a new job following a termination of employment, entitling the employee to greater severance pay.

The government has also introduced programs to protect workers and businesses that have been negatively impacted by the global pandemic. More details on these programs are provided below:

Benefits for Employers and Employees
Millions of employees have been terminated or temporarily laid-off due to business closures resulting from COVID-19. If you have been terminated from your employment as a result of COVID, you may be entitled to enhanced severance pay given the difficulty you are likely to confront in obtaining replacement employment in a timely manner given the economic downturn. You can contact our employment law firm for a free consultation to discuss your employment rights.

The government of Canada has introduced a number of programs to assist employers and employees that have suffered as a result of the COVID-19 pandemic.

Canada Emergency Response Benefit
The Canada Emergency Response Benefit (CERB) is available to workers (i.e., employees or independent contractors) who have lost their job on account of COVID-19. The Benefit is available to workers:

  • Residing in Canada, who are at least 15 years old;
  • Who have stopped working because of reasons related to COVID-19 
  • Who had employment and/or self-employment income of at least $5,000 in 2019 or in the 12 months prior to the date of their application; and,
  • Who have not quit their job voluntarily.

The amount of the CERB benefit is $2,000.00 per month for a period of four (4) months.

Canada Emergency Wage Subsidy
The Canada Emergency Wage Subsidy is available to employers whose revenues have decreased by at least 30% as a result of COVID-19. The benefit covers up to 75% of employee wages on the first $58,700 employees earn, or up to $847 per week. The program covers wages from March 15 to June 6, 2020 – and may be (but hopefully will not be required to be) extended should the pandemic continue on for longer than anticipated.

The purpose of the CEWS is to enable employer’s to re-hire workers or at least refrain from laying-off workers due to the economic downturn. To receive the wage subsidy, the employer must be eligible as defined by the benefit, which includes various types of entities (sole proprietor, partnership, corporation, non-profit, etc.) that has suffered an eligible revenue reduction (i.e., 15% revenue decline in March 2020 and 30.0% thereafter for April and May 2020).

Canada Commercial Rent Assistance Program
The Commercial Rent Assistance Program was introduced by the government of Canada to reduce rent for small businesses that have been impacted by COVID-19. The program will provide non-repayable loans to commercial property owners to cover 50.0% of three monthly rental payments for the months April, May, and June 2020. The loans will be forgiven if the property owner agrees to reduce the small business tenants rent by 75.0% during the loss period. The small business tenant will then cover the 25.0% remaining rent.

To be eligible to benefit from the program, eligible businesses will have to pay less than $50,000.00 in monthly rent and have seen their revenues decline by 70.0% as a result of COVID-19 during the three-month period.

If you are an employer or employee residing in Ontario and have questions regarding the governments new benefit programs to assist your business during the economic downturn causes by COVID-19 we would be happy to provide you with guidance. In addition, commercial landlords and small business tenants may require an understanding and interpretation of the Commercial Rent Assistance program to ensure it is implemented in accordance with the benefits parameters.

At Goldstein Law, we practice employment law, commercial leasing, and real estate litigation disputes. We are well-positioned and have the expertise to advise our clients on matters arising out of the COVID-19 crisis.

Force Majuere & Frustration of Contract In Commercial Leases

Force majeure is a French term – it means “major or superior force.”  It is an unforeseeable event that is outside of the control of the parties. It is a type of contractual provision that you will find across contracts, including in many commercial lease agreements. The clause is included to let a party off-the-hook when something extraordinary happens. Something that makes it impossible to do the thing they thought they could do when they entered into the contract. The common thread is that of the unexpected. Something beyond regular human foresight and skill.

When reviewing your commercial lease agreement, you must look at the Force Majeure (“FM”) clause in the context of COVID-19 as it relates to your [in]ability to continue operating your business.  Thousands of commercial tenants are now confronted by huge cash flows issues with revenue ground to a halt and ongoing liabilities (including lease payments) that they are unable to fund. As a result, one of the options for these tenants may be to invoke the FM clause in their commercial lease agreement. 

It important to review the specific language of the FM clause in your commercial lease agreement. Some FM clauses say that such a scenario only applies if “performance of obligations under the contract becomes impossible.”  That means it is not physically possible for the party to do the thing that was set out to do when the contract was entered.   The impact of COVID-19 on your specific business is a key consideration to determine whether it makes continued operation impossible (i.e., schools, restaurants, and other non-essential business that are subject to mandatory government closure) or more difficult to perform but still possible to operate. Can the tenant and its employees still gain access to their premises to retrieve files and/or laptops in the event access to the building is restricted?

You must consider what types of events will trigger a FM based on the wording of the lease. Some contracts may be silent on this.  Others will be specific – naming specific events that constitute FM (e.g. flood, strike, fire, or ‘Act of G-d,’ etc.).  The unifying thread of an ‘Act of G-d’ is an uncontrollable event that was not foreseen at the time the contract was entered into.  When the contract was negotiated may be critical. For instance, some contracts may expressly stipulate “pandemics” in FM clauses. Especially those that were negotiated around the time of the SARS virus. 

The determination as to whether COVID-19 is considered an FM event is based on how that term is defined in your contract. 

In many cases, parties to a contract could reasonably argue that they could not foresee the pandemic at this scale occurring at the time the contract was entered into.   On the other hand, just because it is more economically difficult for the party to perform the agreement, the simple fact that the event has caused a constraint on profitability, it may not be enough to trigger the FM clause.

If it is Physically Possible To Continue To Operate My Business But It Will Be Extremely Costly – What Are My Choices?

Do I have to pay my contractual obligations or just pay damages for breach of contract?  There is a well-recognized ability in the case law that it may be more economical for a party to an agreement to cease performing an agreement and breach the contract, rather than continue performing and lose money – this is often referred to as an ‘efficient breach.’   The counter-party in the breach of contract can be made whole, whereas the breaching party will minimize its losses by ending the contract at that time.

A key consideration is if a party breaches a contract with another party – that may impact the counter-parties ability to perform its other contractual relationships, which could lead to a cascade of breached contracts with third-parties.  Those other parties could potentially bring a claim against the initial breaching party based on tort law principles.  

Whatever industry you operate in, your company must consider how they will continue their business in the face of COVID-19.  Parties should take into account commercial leasing considerations and review their leases to determine what rights and obligations they have in light of COVID-19.

What Happens If You Do Not Have an FM Clause in Your Contract? Frustration of Contract

You may be able to rely on the doctrine of frustration of contract. Frustration is the occurrence of an unforeseen event that causes a radical change in performance of contract. This radical change makes performance under existing circumstances impossible, impractical or frustrates the original purpose of the agreement. The onus would be on the party alleging frustration of the contract to prove these elements.

According to the Supreme Court case Naylor Group Inc. v Ellis-Don Construction Ltd., the doctrine is applied where, “a situation has arisen for which the parties made no provision in the contract and the performance of the contract becomes ‘a thing radically different from that which was undertaken by the contract.’ The result of a successful frustration claim is that the contract is deemed frustrated and all obligations are extinguished as of the date of the supervening event.

If you have any questions with respect to your commercial lease and your rights and obligations in the face of COVID-19, it is important that you speak with qualified legal counsel to discuss the same. 

Breach of Real Estate Deal By Sellers

We represent defaulting and non-defaulting sellers and buyers in breach of contract claims relating to real estate agreements of purchase and sale.  We have found that a number of sellers will sign an Agreement of Purchase and Sale, and later decide to change their mind and not sell.  If the prospective purchaser does not agree to sign a Mutual Release, which releases all parties from future claims and actions against one another, the seller could be exposed to a claim for breach of contract.

Sellers may wish to terminate an Agreement of Purchase and Sale if they have entered into the agreement prior to a general price increase in the market.  In such a scenario, the sale price of the property may be below the current market value of the home.  As such, the seller will not wish to sell their property at a price lower than the market. Accordingly, the seller will attempt to default on their agreement, hoping that the buyer does not seek recourse. Buyers of these properties, intending to close the transaction and experience an immediate capital appreciation, will pursue sellers for all losses that are a reasonable and natural consequence flowing from the breach of contract.

With a recent downturn in the Toronto residential housing market, buyers are now walking away from their deposits after they have entered into Agreements of Purchase and Sale, and they may be unable to recoup the same unless through a Mutual Release, Court Order, or the closing of the home.  When you are embroiled in a real estate dispute, it is advisable to call a lawyer that understands the standard form documentation that governs real estate transactions in Ontario, and how to protect your rights.