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Jul 3, 2020

Court Enforces Exculpatory Clause Dismissing Condominium Class Action

By Steve J. Tenai, Brian Chung and Martin Henderson

Pre-construction condominium developments are subject to the risk that the development may be cancelled. Over the last several years, we have seen the cancellation of several significant developments.

This has prompted the introduction by Tarion, for projects going to market after January 1, 2020, of the requirement that agreements of purchase and sale include an information sheet at the front of the purchase agreement that outlines some of the key potential risks of buying a residential condominium unit in a pre-construction standard or phased condo project. These may include potential early termination conditions within the purchase agreement, such as reaching a minimum sales threshold for the project to proceed, the developer securing necessary financing for construction and completion of the project, and obtaining the required approvals from the municipality. 

But what if a purchaser does not accept that a project has been terminated on valid grounds under the purchase agreement. Can that purchaser sue for loss of bargain in a rising market?

Most pre-construction condominium agreements of purchase and sale include terms limiting recovery on the termination of a purchase agreement to deposits plus interest as required under regulations. Clauses excluding damages and costs, including loss of bargain and loss of profit, are common terms in such agreements. But are they enforceable?

That was the issue in the Ritchie et al. v. Castlepoint Greybrook Sterling Inc., 2020 ONSC 3840, released in late June 2020, in which the Ontario Superior Court of Justice dismissed a proposed class action seeking damages on behalf of purchasers under purchase agreements to a cancelled development on the basis of the following exclusion clause in the agreement:

            28. 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.

The plaintiffs alleged that the development had been invalidly terminated purportedly because financing could not be obtained, asserting that the developer failed to meet its contractual obligation to take commercially reasonable measures to secure the needed financing. The plaintiffs sought to certify a class action for breach of the purchase agreement on behalf of all purchasers. They claimed damages in the tens of millions for loss of bargain (i.e. the increased value of unit compared to the purchase price). The developer moved for summary judgment to dismiss the action on the basis that the exclusion of damages clause precluded the plaintiffs’ action.

Justice Perell applied the test set out in the Supreme Court of Canada decision in Tercon for exclusion clauses. First, the court must determine whether the exclusion clause applies to the circumstances of the case. Second, if it does apply, the court must consider whether there was any unconscionability. Third, the court can consider whether to not enforce the otherwise valid exclusion clause because of some overriding public policy consideration.

The plaintiffs did not raise unconscionability, but focused their argument on the first and third considerations under the Tercon framework. Their main argument was that interpreting the exclusion clause to encompass breaches of the purchase agreement is inconsistent with the contractual obligation to use commercially reasonable efforts to obtain financing and complete construction under the Tarion addendum, which obligations cannot be contracted out of.

Justice Perell agreed with the developer’s position that the exclusion clause applies even where there has been a breach of the obligation to take commercially reasonable efforts. His Honour noted the recent decision of the Ontario Court of Appeal in Chuang v. Toyota Canada Inc., which upheld an exclusion of damages clause where the court had found the cancellation of an auto dealership contract was in breach of the duty of good faith. In terms of the plaintiffs’ argument that such an interpretation was contrary to the Tarion addendum, which is paramount, Justice Perell found that other than mandating the return of deposits plus interest, the Tarion Addendum expressly allows parties to enter other termination agreements and hence does not preclude a developer from limiting its liability to exclude damages. Rather, the exclusion clause represents a legitimate way to allocate risks, commenting that “As a matter of freedom of contract, the contracting parties are free to allocate that risk as they may decide in accordance with their mutual intentions.

Justice Perell further rejected the argument that enforcing the exclusion clause would render a developer’s obligations to exercise commercially reasonable efforts meaningless. He noted that developers still have that obligation and, if breached, purchasers have the remedy of rescission for an anticipatory breach, which he saw as a “fair and reasonable remedy, particularly in the context of the fluidity of the market for real estate.” The outside completion date for the development was in 2022 and Justice Perell commented that who’s to say what the value of condominium units will be at that time.

Therefore, as a matter of contract interpretation, the exclusion clause applied and there was no public policy reason that would override the enforcement of the clause which provides a complete defense to the claim for damages. The action was dismissed.

The decision’s enforcement of the exclusion clause will likely have broader implications for other cancelled developments as most pre-construction condominium agreements include comparable clauses.

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