The standard form agreement of purchase and sale for the property includes a clause permitting the buyer to require that the seller remove or remedy “any valid objection to title or … any outstanding work order or deficiency notice.” Recently, this clause was interpreted by the Court of Appeal in EPRF Holdings Limited v. Fergus Bloor Inc. in the context of a requisition by a buyer to remove an open building permit as part of the sale.

The buyer in the case was Fergus Bloor Inc. (“Fergus”). Fergus paid a $350,000 deposit to be held in trust pending the closing of the sale of a commercial property on April 1, 2020. On February 21, 2020, Fergus advised the seller, EPRF Holdings Limited (“EPRF”), that it had discovered two open work permits issued concerning the property by the City of Toronto. Fergus requested that EPRF remove them. Several weeks later, Fergus repeated this request, and on March 18, 2020, EPRF confirmed for Fergus that both permits had been removed. During this time, Fergus also sought an extension of the closing date, which EPRF refused.

On March 31, 2020 (the day before the scheduled closing date), Fergus told EPRF that one of the outstanding work permits had not been removed, despite EPRF’s earlier statement. Fergus indicated it remained willing to close but would not until the issue was resolved. It also assigned the Agreement of Purchase and Sale to a new company, Storekey Holdings Inc. (“Storekey”).

On the closing date (April 1), Storekey indicated to EPRF that it was terminating the Agreement of Purchase and Sale due to the outstanding work permit, even though EPRF had offered an undertaking and indemnity regarding the work permit. EPRF subsequently sued for the deposit and damages, while Fergus and Storekey counterclaimed for the return of the deposit. The matter was brought before the Superior Court of Justice through motions for summary judgment.

The motion judge found in favour of the defendants (including Fergus and Storekey) and awarded the return of the deposit, concluding that Fergus and Storekey had been entitled to terminate the Agreement of Purchase and Sale because of the open work permit. On appeal, EPRF argued that this conclusion was in error. Specifically, it argued that the outstanding permits were not material, did not create a risk of litigation, and did not go to the “root of title” to allow termination of the Agreement.

Seller Argued That The Motion Judge Should Not Have considered Buyers’ Subjective Concerns

The motion judge found that the work permit had been open since 2011. The judge further found that when Fergus and Storekey had discovered that one of the work permits remained open despite the representation by EPRF, it had been removed. This signalled to the buyers that there was a problem with removing that permit. As such, EPRF could not deliver a “good and marketable title.” The Seller argued on appeal that the motion judge erred in considering evidence of the buyers’ subjective concerns.

The legal test for determining whether a deficiency is sufficiently material to justify terminating an agreement for the sale of property was set out many years ago in Stefanovska v. Kok. In that case, the High Court of Justice considered whether an easement on a piece of property was a valid objection to title in the context of the sale of the property.

The Test For a Valid Objection To Title Is Whether The Impediment Would Affect The Use or Enjoyment Of The Property In A Significant Way

The Court in Stefanovska stated that the legal test to be applied in such cases was whether the seller could convey “substantially what the purchaser contracted to get.” In other words, the test was whether the problem with title “would, in any significant way, affect the purchasers’ use or enjoyment of the property.”

In that case, the Court noted that “the materiality of the deficiency” was to be determined objectively but also noted that this did not equate to ignoring the “subjective views of the purchaser.” For example, if a buyer agreed to purchase the property “for a specific, legitimate and bona fide purpose” that would be rendered impossible by the problem with the title, this would be relevant. Conversely, if the buyer’s needs were “capricious or arbitrary” or “contrived to avoid contractual obligations,” then those subjective needs should be given no weight.

Court of Appeal Finds That Concerns Over Open Work Permit Were Legitimate and Gave Rise to a Valid Objection

In EPRF Holdings, the motion judge rejected the argument that Fergus had acted in bad faith. The Court of Appeal noted that the open permit raised three “legitimate and non-trivial concerns” for Fergus and Storekey. First, as a result, they could not procure title insurance. Second, the open permit might impede their ability to sell the property. Third, they might have to seek a Court to address the open permit if the City did not remove it for them.

The Court of Appeal noted the cases of Thomas v. Carreno and 1854822 Ontario Ltd. v. The Estate of Manual Martins. In the latter case, the Superior Court of Justice observed that where “the purchaser’s right to enjoyment of the property is by no means certain,” then the open permit is not a “minor defect” but instead “goes to the root of title.”

EPRF argued that the work permit in issue in 1854822 related to “possible remedial work that had to be completed,” whereas the permit in issue in EPRF Holdings did not “on its face” concern a deficiency with the property. However, the Court of Appeal rejected this argument. It was noted that the open permit still created a risk for Ferus, as evidenced by EPRF’s inability to get the permit removed by the City. Further, the Court of Appeal observed that a buyer cannot be required to take title, which would create a risk of litigation for them. It noted that a “good and marketable title” meant “free from litigation, palpable defects, and grave doubts and couples a certainty of peaceful possession with a certainty that no flaw will appear to disturb its market value.”

The Court ultimately dismissed the appeal.

Toronto Commercial Real Estate Litigation Lawyers Experienced In Open Building Permits on Real Estate Transactions

This recent Court of Appeal decision provides valuable insights for buyers and sellers involved in real estate transactions. If you’re considering purchasing a property with an open building permit, it’s crucial to consult with legal counsel to understand your rights and obligations. Our team of experienced commercial real estate litigation lawyers at Milosevic & Associates in Toronto can help you navigate these complex issues and protect your interests. Call us at 416-916-1387 or contact us online to learn how we can help.