Agreements dealing with real property are typically only binding if made in writing and executed by the parties. However, the Ontario Court of Appeal recently upheld the binding nature of an unexecuted agreement due to the parties’ partial performance of the contract. The decision emphasizes the need for clear communication when negotiating agreements, particularly when a right of first refusal or offer is part of the deal.
The facts
In Erie Sand and Gravel Ltd. v. Seres’ Farms Ltd., [2009] O.J. No. 4179, Erie approached the vendor (Seres’ Farms) about purchasing land. Erie did so with the knowledge that a third party, Tri-B, had a right of first refusal on the property. Because of this right, Erie refused to provide a written offer until the terms of the agreement were finalized verbally.
After a series of meetings, Erie submitted a written offer and a deposit for the full purchase price of $1,193,082. Seres said it would accept this offer if Tri-B did not match the offer with the "same deposit, terms and conditions" within five banking days. However, Seres did not sign the offer.
After receiving notice of Erie’s offer, Tri-B opted to match it, with the exceptions that the closing date would be three weeks later and the deposit would be $25,000, with the remainder of the purchase price to be paid on closing (in part by way of a vendor take-back mortgage). Nevertheless, Seres accepted this offer, despite the difference in the terms and conditions between it and Erie’s offer, and the property was transferred to Tri-B.
The outcome
Erie claimed that there was a binding agreement between it and Seres, conditional on Tri-B refusing to match the offer. Erie’s position was that since Tri-B failed to meet all the conditions of the offer, Seres must transfer the land to Erie.
Tri-B argued that no legal contract existed between Erie and Seres, merely that they had an "agreement to agree." Two levels of courts in Ontario agreed with Erie. Although there was no signed contract, all of the essential terms were established and both parties intended the agreement to be binding. Most importantly, Seres had shown "partial performance" of the agreement, taking Erie’s offer to Tri-B.
Part performance
To protect against fraud, the Ontario Statute of Frauds requires that any agreement to transfer land must be written and executed. An exception to this requirement is the doctrine of part performance, which applies because the risk of fraud in such circumstances is minimal.
In Erie, the court stated that in assessing part performance, it is not just a plaintiff’s actions that are relevant, but also a defendant’s actions. In this case, in addition to Erie preparing the offer and providing a deposit which Seres accepted, the steps taken by Seres in delivering the offer to Tri-B also contributed to the finding that there was part performance.
The court conceded that, generally, an offer to purchase land accompanied by a deposit would not constitute part performance. However, because of the intention by Seres to trigger the right of first refusal and the acceptance of a deposit for the full purchase price, a reasonable person could conclude that there was part performance in relation to some dealing with the land.
Three practical tips
Here are three practical tips to consider in light of the court’s ruling on unexecuted agreements in Erie:
1. The safest way to ensure that verbal communications are not binding is to regularly express in correspondence—whether written or oral—by lawyers, clients or real estate agents, that the communications are not binding on the parties until an agreement is finalized and executed by both parties.
2. Monitor your clients’ activities in the midst of negotiations to ensure that any actions performed during negotiations cannot be construed as partial performance of a binding agreement. Ideally, no obligations of an agreement should be performed until the contract is finalized and executed.
3, In Erie, Tri-B had only five days to match the provided offer. Given that the offer included a deposit equal to the entire purchase price, Tri-B’s ability to match it during that time was severely compromised. To avoid this, a sufficient notice period should be negotiated to allow enough time to deal with these types of unexpected circumstances.
Erie emphasizes that legal advice should be sought during negotiations of real property transactions, particularly where future rights or rights involving third parties are involved.
Brennan Carroll is a partner in the Toronto office of Borden Ladner Gervais LLP and is a member of the Commercial Leasing Group, Commercial Real Estate Group and Public-Private Infrastructure Group. His practice focuses on the development, purchase, sale, leasing and financing of commercial properties. Marc Reardon is an articling student at the same office.
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