The ​latest on ​creative (but ​unsuccessful) ​attempts to ​get ​out of a ​really ​bad ​real ​estate ​deal 

By Irvin Schein, Litigation Lawyer, Mediator, and Arbitrator
Originally published at irvinschein.com. 

In the recent case of Forest Hill Homes (Cornell Rouge) v Peimian Ou, Mr. Justice Morgan of the Ontario Superior Court dealt with a summary judgment motion relating to an aborted real estate deal.

In this case, Ou agreed to purchase a home to be built from the plaintiff, Forest Hill Homes, for about $1.7 million. Ou provided deposits that added up to over $100,000 and, on closing, had to come up with almost $1.6 million to close.

On that day, Forest Hill Homes was ready to close the transaction, but Ou did not have sufficient funds.

This apparent breach of contract led to a lawsuit and ultimately to a motion for judgment brought by Forest Hill Homes.

At the motion, Ou brought out a series of arguments in an attempt to concoct a defence to what seemed to be an indefensible position.

Firstly, he argued that his performance of his obligation to close was made impossible by a drastic and unforeseeable drop in the real estate market. This, in turn, made it impossible for him to obtain the required financing. Accordingly, the contract was frustrated and Ou should be relieved of the obligation to close.

In fact, the property which he had agreed to purchase for over $1.7 million was, as at the date of the motion, worth just over $1 million. The fact that the real estate market had dropped significantly could not be challenged. However, and not surprisingly, the Court ruled that this did not amount to a frustration of contract. For a contract to be frustrated, there must be a radical change that transforms the nature of the contract. Here, the parties had intended that the property be sold for an agreed-upon sum. These were the essential terms of the contract and they did not change because of a drop in the market.

Ou then argued that the plaintiff’s sales agent had misrepresented the sale to them. The alleged misrepresentation took the form of the sales agent describing the deal as “the opportunity of a lifetime.” Supposedly this was said to Ou on the day that he signed the agreement of purchase and sale.

This language has been put forward in Court as a basis for a claim of misrepresentation on numerous occasions. It never works. The Court of Appeal has made it clear that to have an effect in law, a representation must be in respect of an ascertainable fact and not a mere opinion. A statement of opinion, judgment, probability, or expectation, or as merely a loose conjectural or exaggerated statement, does not count. This is because the person hearing the statement is not justified in relying on it.

Therefore, even if the sales agent did make that statement, it could never amount to an actionable misrepresentation.

Furthermore, and as is usually the case, the sales agreement contained a clause that made clear that any pre-contractual representation could not be relied upon.

Finally, Ou claimed that he had paid a bribe to the agent to jump the queue of potential purchasers and sign the sales agreement quickly. He argued that this excused his failure to close. In fact, there is no authority in Ontario for the proposition that a person who pays a bribe can have the contract rescinded as a result. In fact, the authorities are clear that it is the defrauded principal of an agent who takes a bribe, not the party paying the bribe, who can have the contract rescinded for that reason.

The last interesting point arising from this case has to do with the plaintiff’s claim for interest.

The agreement of purchase and sale provided that the plaintiff could charge interest in the amount of 20% of the purchase price if Ou failed to pay the balance due on closing. Ou argued that this was excessively onerous and ought not to be enforceable.

Our Court of Appeal has made it clear that a surprisingly onerous term of a contract may be unenforceable if it cannot be presumed that the non-drafting party had actually agreed to it. In other words, a stringent and onerous provision can only be relied upon if the party seeking to do so can show that reasonable measures were taken to draw the terms to the attention of the other party.

In this case, there was no evidence that this particular provision had been drawn to Ou’s attention when he signed the agreement of purchase and sale and accordingly, the plaintiff was unable to enforce it.

At the end of it all, judgment was awarded against Ou for over $500,000, being the difference between the purchase price and the value of the property at the time of the motion. In addition, he forfeited his deposits.

This would seem to be a rather extreme consequence arising from a drop in the real estate market, but unfortunately for Ou, that is simply how the numbers turned out.