A promise to purchase is never to be taken lightly

Article locked Published on by Me Annie Lapointe

Topic(s): Legal

Note aux lecteurs : Ces articles sont des résumés de décisions rendues dans les affaires citées. Veuillez noter qu'il ne s'agit pas d'une revue de la jurisprudence et que d'autres décisions peuvent être rendues par la suite ou être différentes et changer l'état du droit. C'est également le cas si les faits ne sont pas les mêmes que ceux présentés dans l'affaire mentionnée.

A promise to purchase is never to be taken lightly

In the current turmoil of the real-estate market, offers to purchase properties are sometimes plentiful. However, it's important to know that an offer to purchase is not to be taken lightly. Indeed, let us mention that according to the law, a contract is formed by the only exchange of consents between persons capable of contracting. This exchange of consents occurs through the manifestation of a person's willingness to accept the offer made to him by another person. So, it could even be done verbally.

Usually, when we proceed formally, everything is done by exchanges of offer, acceptance, counter-offer, or refusal by means of writing, with the aim of preserving evidence and above all, by putting clear conditions in there.

It will happen that, despite a formally accepted promise, not everything does go as planned and that a clear wording does not alleviate the disagreement concerning the completion of one of the conditions. If one of the two parties unlawfully withdraws from the promise according to the other party, it is possible that an action be brought in order to oblige the other to buy or sell, as the case may be, under the terms of the following section of the Civil Code of Quebec:

« 1712. Failure by the promisor, whether seller or buyer, to execute title entitles the beneficiary of the promise to obtain a judgment in lieu thereof. »

In a situation that was the subject of a recent judgement, on appeal (1), a couple wishing to settle in Quebec mandated a friend to visit a building in 2013, for which a lease was signed pending the purchase, because a minimum period of time is required to allow newcomers to build up a credit file in the country and meet the qualification requirements for a mortgage loan requiring the participation of the CMHC (Canada Mortgage and Housing Corporation). The promise to purchase was signed a few days later and the purchase had to be received before a notary on or around August 1, 2014.

It was in March, after learning that their mansion for sale in France was destroyed by fire, that the situation got worse according to the decision. The buyers (*) start to complain about certain matters related to the house and the neighbourhood. Moreover, the financial institution tells them at the end of April 2014 that the CMHC rules have changed and that the required credit history is rather 12 months now.

On May 29, the buyers send a letter to the sellers mentioning their intention to no longer be buyers, citing significant defects in the property, as well as the inability to obtain a mortgage loan within the prescribed period. It is also a few days later that they are formally informed that their mortgage application has been refused for the moment, and that they will be able to reassess the application within 6 months. Shortly before the planned date of purchase, the buyers therefore leave the dwelling and rent another dwelling that they will buy later. But, still according to the decision, the day after their departure, the sellers indicate their intention to use the clause of the promise allowing them to apply for a mortgage loan on behalf of the buyers. Not having their collaboration, they will not go any further, but will then bring their action for the transfer of title in order to oblige them to respect their commitment.

The judge in the first judgement rendered (in first instance) decides that the proposing buyers have not taken sufficient steps to comply with their obligations under the promise to purchase, in particular by refusing to consider other alternatives or for having tried to apply for a mortgage loan from another financial institution. For the judge, the buyers therefore preferred to find there a reason to withdraw from the acquisition of the dwelling. According to the decision, she concludes that the buyers should acquire the dwelling. The action in passing of title is thus allowed, thus ordering to proceed with the signing of the deed of sale, failing of which the judgement will be equivalent to signature. The buyers are therefore ordered to pay the sum of $275,000.00 in payment of the purchase price as agreed, as well as damages with interest.
The buyers, dissatisfied with this decision, appealed it, appeal that was allowed in February 2021. The appeal decision mentions the various criteria in order to oblige to pass title according to the law. Among other things, the presentation of a deed of sale in accordance with the promise would be one of the essential conditions for obtaining a judgement that takes its place, as well as offering the fulfillment of one's own obligations, including the offer of a clear title. The judge in first instance had accepted that this was a clear title if there was only one mortgage to be written off, which would be written off following payment of the mortgage loan with the purchase price. This is what is usually done in most cases when selling a property.

What is peculiar when such a remedy is undertaken by the seller is that he/she is literally dependent on the willingness/ability of the buyer to pay the expected price. The judgement alone cannot be valid as a title deed, unless the buyer has already made the payment, he who, moreover, refuses or neglects to sign the deed: « 77- (…) In short, we must face the facts, the resistance of the buyer to pay the sale price leaves the seller, except in rare cases, the recourse for damages after resale of the building, as the only effective remedy ». Even if the judge agrees that the release of these charges before the judgement is not without constraint for the seller because he will have to repay his mortgage loan with his own funds.

Therefore, it is decided in the judgement that the sellers were not able to fulfill one of the essential conditions for the award of title, namely to offer a clear title, and that a judgement could only be conditional on payment of the sale price, which does not meet the conditions for a judgement to be valid as title of ownership. The judge, in the decision on appeal, therefore decides that the failure to meet the essential conditions for the transfer of title requested by the sellers should have resulted in the rejection of their action. The appeal is therefore allowed in order to dismiss the action for the award of title.

Even if, in the circumstances, the proposing buyers were successful, the fact remains that each party had to bear nearly six years of legal proceedings, with all the inconvenience that this causes.

(1) 500-09-027706-183, 2021 QCCA 90.
(*)In order to simplify the text in this article, the proposing buyers, being the appellants in the judgement cited, will simply be called the « buyers ». Likewise, the proposing sellers will be called the « sellers ».

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