The following article has been copied with permission from Wojcik Law. Please visit them at www.wojciklaw.ca
The duty to act in “good faith” in real estate contracts was dealt with in a recent Supreme Court ruling Bhasin v. Hrynew. The Court’s decision re-wrote existing Canadian case law about the legal duties of contracting parties during the negotiations of the contract and after the contract has been signed. The Court ruled that during the negotiation process each party have a right to pursue his or her individual self-interest and does not require either party to consider the interests of the other party ahead of his or her own. However, after the contract has been signed, the parties to the contract must perform their obligations arising from the signed contract part in “good faith” in an honest manner throughout the course of a transaction.
The parties must co-operate in order to achieve the objects of the contract. The duty to act in “good faith” forces both parties to make a reasonable effort to satisfy their part of the bargain. The parties have to act fairly, with diligence, care and duty of honest performance of their contractual obligation and they should refrain from evading their duties or “to act in a way that defeats the very purpose and objective of the agreement”.
What does this mean to the buyer and seller and you as their agent?
As an agent, you should always advance and protect your client’s interests. Always check and verify the information you receive from your client or the other party. Do not rely on the promises of the seller or buyer or the other party’s agent. Include in the Agreement of Purchase and Sale absolutely everything which is important to your client, and remember, that if it is not in writing it is not binding.
When acting for the buyer
- Include all relevant conditions to protect your client's interests with sufficient time allotted to fulfill those conditions.
- Explain that the duty to act in “good faith” forces buyer to take all necessary steps needed to close the transaction, therefore, the buyer must apply for financing, conduct the home inspection, arrange the home insurance within time allotted to do so. In Rice v. Rawlik the Court concluded that buyer acted in “bad faith” when the buyer refused to close the transaction because of several outstanding work orders. The buyer knew about the work orders but choose to raise the problem just before closing so there was not sufficient time for the Seller to remediate them.
- Explain, that a buyer would not be allowed to bring a contract to an end for an undisclosed reason or for a condition not contained in the Agreement of Purchase and Sale, but are limited in their ability to terminate the Agreement for actual conditions such as obtaining financing in the buyer’s “sole and absolute discretion”, inspection condition, insurance or lawyer’s approval of a condition, if buyer have a sudden change of heart.
The buyer is allowed to terminate the Agreement only in case that the condition can not be satisfied but not for any other reason such as buyer’s remorse. If a buyer is concerned he may change his mind, or needs to sell his exiting property in order to have funds to buy the new property, the agent needs to insert the appropriate condition allowing the buyer to terminate the agreement for whatever reason in the buyer’s sole and absolute discretion, within a defined period of time after acceptance. However, keep in mind that most sellers would probably not accept such a condition. The buyer also cannot rely on a lawyer’s approval condition to terminate the contract unreasonably. Unless there is a legitimate legal reason to do so, the lawyer would not advise and suggest that the buyer should terminate the transaction.
When acting for the seller
- Explain that the sellers are not obliged to accept all the buyer’s conditions and at least they should try to negotiate to modify the restrictions or limitations. Specifically they should negotiate those conditions that allow the buyer to terminate the contract in the buyer’s “sole and absolute discretion”. For example, in the case of an inspection condition, you can insert into the Agreement a clause that the buyer could not terminate the contract without disclosing the reason for the termination and allow the seller to decide if he or she wants to remediate the problem by making the appropriate repairs or upgrades. The other suggestion could be to allow the termination only if the costs of repairs exceed an amount specified in the agreement. In case of a financing condition, the seller can insist on replacing the buyer’s condition with one more specific by including in the contract the amount of principal of the mortgage the buyer is seeking, the rate of interest and the term of the mortgage.
- Explain that the sellers should not unreasonably interfere or hinder the buyer’s efforts in discharging his or her obligations under the contract, for example, to refuse access to the house or condominium for inspection purposes or to let the lender’s appraiser to appraise the [property for financing purpose.
The bottom line: Because of the duty to act in “good faith,” the party who has failed to use his or her reasonable efforts to fulfil his or her part of the contract, will not be permitted to rely on his failure to terminate the agreement.
Generally speaking, the parties to an agreement should not enter into a contract with little or no intention of performing. They should not act in a capricious or arbitrary manner and should take greater care in how they communicate with each other. Conduct such as lying or deceiving the other party can potentially give the injured party rise to claims for damages of negligent or fraudulent misrepresentation. In the event of a breach of the duty to act in good faith, the court may order an award against the seller of specific performance or damages resulting from their conduct, the buyers risk loosing their deposit and both parties may potentially suffer a lot of stress and costs in case of lengthy litigation.