In real estate transactions, rules and consequences have become more clear over the years when either the vendor or the purchaser fails to
close on a transaction.  

But a recent decision from British Columbia's highest court has shed light on what happens when neither side honours the deal, or both parties fail close on time.

When both sides default

The British Columbia Court of Appeal in Lal v. Grewal has ruled on situations where both parties fail to fulfill their obligations on the closing date. The court in Grewal found that, in such situations, the agreement can still continue if either side reinstates it upon reasonable notice.

In Lal v. Grewal, both the vendor and purchaser failed to close on time and did not have the proper items on the closing date. The court held that neither side was ready to close and that the contract was still alive and a new closing date could be set.

Previously, in Fortress Carlyle Peter St. Inc. v. Ricki's Construction and Painting Inc., the Ontario Court of Appeal dealt with a situation where an agreement of purchase and sale provided that closing would take place at 6 p.m. on a certain date and that time was of the essence for the transaction.

According to the agreement, the vendor had to provide tenant estoppel certificates five days before the closing date. This term was not honoured and a proper estoppel certificate was not delivered until the hour before the closing time.

The purchaser requested an extension of the closing until the next morning as a result of the late delivery. The vendor denied the request and claimed that it was “ready, willing, and able to close the transaction that day, and if closing funds were not received by 6:00 p.m., [the vendor] would note [the purchaser] in default and the APS would be terminated.”

The purchaser was not able to transfer the closing funds until about 6:16 P.M. and then tried to close. The vendor claimed the purchaser breached the agreement and refused to complete the transaction on the basis the purchaser did not honour the time of the essence clause in the agreement.

The purchaser brought a successful action to force the vendor to complete the transaction. The judge found the vendor did not act fairly or honestly by failing to deliver the estoppel certificate on time and then refusing to close.  

The decision was upheld on appeal and held that, if a party is going to insist on time is of the essence, it has to show that it “(i) it had to have shown itself to be ready, desirous, prompt, and eager to carry out the APS; and (ii) it could not have been the cause of the delay or default in performing the APS. Neither of these preconditions was satisfied.”

By failing to deliver the certificate on time, the vendor could not claim that it was eager to carry out the terms of the agreement. The court noted the vendor’s “delay, deceit, and breach of contract” in failing to provide the certificate on time “meant it could no longer rely on time being of the essence. Its misconduct precluded that reliance.”

However, since both sides technically defaulted by failing to close on time, the court confirmed that, since neither party complied with the agreement, either of them could revive it upon reasonable notice of a new closing date. The court held that was “precisely what occurred” when the vendor tried to close on the following day.

What to keep in mind

The most important takeaway is that, if neither side honours the agreement, it will not automatically terminate and can be revived if either party provides reasonable notice.

In this regard, the party providing such notice should be able to show it was always ready to close and acted honestly at all times.

These scenarios serve as a reminde real estate transactions don't always proceed as planned. But it also provides a mechanism for salvaging deals when both parties stumble at the finish line.  

As always, clear communication and good faith dealing remain crucial in navigating these situations.

EDITOR'S NOTE: This is an updated version of the column, which was provided by the author after the original had been published.