Seller's Bad Faith -- Financing Condition

It has been long established that a financing condition requires a buyer to act honestly and in good faith to obtain financing necessary to close the purchase. A recent case involved a financing condition often Imposed by the developer of new homes which requires a buyer to demonstrate the ability to close on the basis of a mortgage commitment (or cash from own resources). This was a condo project to close several years later.

The buyer had provided satisfactory evidence of financing at the time of the Agreement of Purchase and Sale ("APS") but as a result of the new stress tests imposed in January 2018, the developer required all buyers to up-date their mortgage commitments with the result that over 80 percent of them no longer qualified (and all of them received back their deposits).

After many attempts over several months to satisfy the developer’s financing demands while under threat of default and forfeiture of deposit monies of $55,614, the matter was brought to court to determine whether the buyer had complied or was in default. During the proceedings, it was found that the developer had decided against continuing the project as a condo (opting instead for a rental project).

The judge decided that the buyer had indeed complied with the terms of the financing requirements in the APS and went on to state that the developer had acted unreasonably and in bad faith in respect of the financing requirement by demanding an unconditional mortgage commitment (or the ability to pay all cash) for a purchase many years from closing. The judge inferred from the developer’s treatment of the buyer’s financial information and efforts to comply that it had already made the decision to discontinue the condo development at the time it terminated the buyer’s APS.

TOPICS FOR DISCUSSION

1.      Would the result have been the same if the judge did not find strict compliance with the terms of the financing condition yet found bad faith dealing on the party of the seller? This decision appears to indicate this is the case.

2.      Other Ontario cases (particularly those involving strict adherence to “time is of the essence”), would suggest that reliance upon clear contractual terms cannot amount to bad faith.