When Time Is Of The Essence, Don't Act In Bad Faith

Earlier this year, in 1179 Hunt Club Inc. v. Ottawa Medical Square Inc., 2019 ONCA 700 the Ontario Court of Appeal provided some important guidance on "time is of the essence clauses" in real estate transactions. It was held that if one party insists on strict adherence to a time of the essence clause, they will be held to the same standard. Specifically, a vendor in a commercial real estate transaction cannot force a purchaser to abide by a time is of the essence clause, if they are not prepared to do the same. See our previous blog post.

The Court of Appeal recently revisited this topic in Fortress Carlyle Peter St. Inc. v. Ricki's Construction and Painting Inc., 2019 ONCA 866, where it was held that a time is of the essence clause is not enforceable by a party that acts in bad faith.

In that decision, the plaintiff, Fortress Carlyle Peter St. Inc. (Fortress) entered into an agreement to purchase a commercial property in Toronto from the defendant, Ricki's Construction and Painting Inc. (Ricki's).

Fortress had tried to purchase the property from Ricki's since 2013 as part of a large-scale condominium development project. Finally, in the summer of 2017, the parties reached a deal. But the property had four commercial tenants, one of which was 1739474 Ontario Inc. (173), a company owned by the brother of the owner of Ricki's.

A letter of intent was signed. Fortress agreed that it would buy the property for $4.5 million, subject to it being satisfied with the leases that encumbered the property.

After reviewing the leases, Fortress informed Ricki's that it was satisfied, and the parties signed an agreement of purchase and sale. Fortress had noted that 173's lease contained a provision allowing it to be terminated on 90 days' notice.

The agreement contained the following terms:

The deal would close on August 13, 2018 at 6 pm. Ricki's would provide Fortress with estoppel certificates for all leases in the building at least five days before the closing date. Fortress would pay a $1 million deposit. Time would be of the essence. All the tenants left the building long before the closing date, except for 173.

Ricki's didn't provide the estoppel certificate for 173's lease to its lawyer until the morning of the closing date. Not only was the certificate late, it was incorrect. Instead of stating that the lease could be terminated in 90 days, the certificate was changed to state that termination of the lease "was to be negotiated between the...