Contracts — Formation — Express terms — Conditions and warranties — Conditions precedent — Real property law — Sale of land — Agreement of purchase and sale — Conditions and warranties — Conditions precedent.

       This was an application for a summary trial brought by the plaintiff, Pabla for a declaration that the defendants, Tara Development (1999) Ltd. breached a contract of purchase and sale. The parties agreed to proceed by way of summary trial. Rai provided affidavit evidence on behalf of Tara Development. In 2002 a contract was entered into between the parties. Pabla was to purchase two lots from Tara. A condition precedent in the agreement was that Tara had to get an unconditional letter of commitment for financing from lenders by a certain date otherwise the contract would be null and void. Rai made efforts to obtain financing. They received a commitment letter. The cost of the construction increased and Tara could not comply with conditions of the commitment letter. Rai obtained an appraisal for the proposed project. The project would cost more than its value. Rai consulted an architect in efforts to redesign the project in a more cost effective manner, however the savings in redesign would be minimal. Rai informed Pabla they were unable to comply with the condition precedent and had been unable to find financing. He advised Pabla that they would return his deposit after Pabla executed a release. Pabla argued the timing for the condition precedent being fulfilled was ambiguous. He submitted he had not read the agreement and was not aware of the condition precedent. Pabla further argued that Tara did not use their best efforts to remove the condition precedent. Rai gave evidence that Pabla had received the agreement and that they had read it through together.

       HELD:  Pabla's claim was dismissed. Pabla was a sophisticated businessman. He knew that Tara required financing to build the project. Even if he did not read the agreement he was aware of the condition. Pabla's evidence was not accepted. Tara used their best efforts to fulfill the condition precedent. Tara spent over two years negotiating financing for the development. When they became aware of the increase in construction costs they consulted with architects in efforts to bring the cost down.

Counsel:

Counsel for the Plaintiff: D.S. Parlow

Counsel for the Defendants: G.M. Elliott, S.S. Parhar

 1      GEROW J. (orally):— This is a summary trial application by the plaintiff for a declaration that the defendants are in breach of a contract of purchase and sale dated October 16, 2002 ("the 2002 contract") between the plaintiff as purchaser and the defendants as vendors of two commercial strata lots located in Surrey B.C. The defendants apply to have the plaintiff's claim dismissed.

 2      Both parties agree that a summary trial of this matter is appropriate. To assist me in resolving issues arising from the conflict of evidence in the affidavit material, the plaintiff and Mr. Rai, the principal of Tara Developments (1999) Ltd. ("Tara") who was involved in the contractual negotiations with the plaintiff, were cross-examined on their affidavits before me.

 3      The plaintiff had sought an order for specific performance of the contract, but abandoned that portion of his application during the course of the hearing.

 4      Having reviewed the affidavit material and having had an opportunity to observe both Mr. Pabla and Mr. Rai on the stand, I am satisfied that this case is an appropriate one for summary trial.

 5      In the 2002 contract, the defendants agreed to sell and the plaintiff agreed to purchase two proposed strata units in a commercial development to be constructed on the corner of 94th Avenue and Scott Road, Surrey, B.C. ("the project").

 6      The project was to consist of 31 strata units in two buildings. The estimated time for construction of the two buildings which were to be connected by a breezeway was 18 months and the total size of the buildings was 80,000 square feet.

 7      At the time that the 2002 contract was entered into, the estimated construction cost was $6.59 million and the financing for the construction of the project had not been obtained. The plaintiff became involved in the project in 2002 when he was introduced to the defendant, Tara through a third party, Terry Mattu, a realtor and principal of Mattu Properties Compagnie Ltd. ("Mattu Ltd."). At the time of the introduction, Mattu Ltd. was involved in a joint venture with Tara to develop the property.

 8      Since the mid-1970s, the plaintiff has jointly owned and operated two East Indian restaurants in the Lower Mainland. The plaintiff and his brother recognized an opportunity in the project which was located in the heart of Surrey's Punjabi market to open a banquet facility and restaurant to service the rapidly expanded East Indian population in the area.

 9      The plaintiff entered into a contract of purchase and sale dated December 18, 2000 ("the 2000 contract") with Mattu Ltd. and Tara to purchase two strata units in the project.

 10      The sale price under the 2000 contract was $2,800,000 and included a restaurant to be equipped in the same fashion as the restaurants previously constructed by the plaintiff's family and a banquet hall being finished on a turn-key basis. At the time that the 2000 contract was entered into, the plaintiff knew the developers required financing and that they would not be able to build the project if they could not obtain it.

 11      The 2000 contract contained the following conditions precedent:

 12      The evidence is that none of the conditions precedent were removed by the dates set out in the 2000 contract.

 13      After entering into the 2000 contract, Tara and Mattu Ltd. encountered various financial difficulties. It became apparent that Mattu Ltd. could not carry its share of the expenses and it was necessary to bring in a new joint venturer, CPRG Investments Ltd. ("CPRG"). I will collectively refer to Tara, Mattu Ltd. and CPRG as "the developers".

 14      One of the difficulties encountered by the developers in proceeding with the project and the reason the conditions precedents in the 2000 contract were not removed was the inability to obtain construction financing.

 15      Mr. Rai's evidence, which I accept, is that in discussions with the plaintiff, after the 2000 contract was entered into, the plaintiff was advised that the anticipated financing was not available from Delta Credit Union and that therefore the project could not proceed. It was agreed between the parties that Tara and Mattu Ltd. would continue to look for the appropriate financing for the development. The plaintiff did not request the return of its deposit. Instead the parties hoped that an agreement would be entered into once the financing was obtained.

 16      The problems regarding obtaining construction financing continued until receipt of a letter of commitment dated October 16, 2002 ("the commitment letter"). Prior to obtaining the commitment letter, the developers had negotiated with Delta Credit Union, Canadian Imperial Bank of Commerce and Vancouver City Savings Union, all of which expressed interest in providing financing, subject to various conditions or contingencies which the developers were unable to fulfil. As well, the evidence is that the developers approached three or four other lending institutions which were not interested in providing construction financing for the project.

 17      During the process of raising financing for the project, the developers were also attempting to presell the project. One of the conditions precedent to obtaining the requisite financing was that a certain percentage of the project be pre-sold.

 18      After signing the 2000 contract, the plaintiff and principals of Tara spoke and met often to discuss the status of the project and the plans for the proposed banquet hall and restaurant. I accept Mr. Rai's evidence that the plaintiff was advised of the ongoing difficulties obtaining financing.

 19      In late 2001, a revised contract was signed by the plaintiff but not by the developers. Although the plaintiff's evidence in his affidavit is that the proposed 2001 contract was at the initiation of the developers, it became evident during cross-examination of the plaintiff that the proposed contract was initiated by him. The project continued to be delayed and the plaintiff felt he was entitled to some concessions. The proposed contract contained additional allowances from the developers for restaurant booths, a sweets counter and an additional partition for the benefit of the plaintiff.

 20      In the negotiations leading up to signing the 2002 contract, the parties agreed to the following:

 21      On October 16, 2002, the plaintiff and the defendants Tara and CPRG executed the 2002 contract that incorporated these changes.

 22      The parties also signed several pages of revised architectural plans which the parties agree were intended to be Schedule A to the 2002 contract. Detailed specifications referenced in the 2002 contract were finalized one day earlier.

 23      The commitment letter from HSBC was also dated October 16, 2002.

 24      The 2002 contract between the parties contained the following condition precedent under the heading "Vendor's Conditions Precedent:

 25      The plaintiff agreed during his cross-examination that he and the developers were working together with a common purpose. The developers wanted to construct the project and the plaintiff wanted to purchase a restaurant and banquet hall. The plaintiff was to be the biggest tenant in the proposed project. The plaintiff agreed that he entered into the 2000 and 2002 contracts to assist the developers in obtaining financing in that the developers needed to show the proposed lender that they had a purchaser for a significant portion of the project.

 26      After entering into the 2002 contract and receiving the commitment letter, the developers undertook a tendering program, soliciting quotes from various trades and contractors. During the tendering process, it became apparent that the cost to build would be approximately 40 percent higher than had been estimated in the May 2002 Quantity Surveyor Report. The construction costs, not including land costs, increased from $5,301,000 to $8,802,782.

 27      As a result, the developers asked the architect to review the plans for possible changes which would result in cost savings. The suggested changes to the plans only amounted to cost savings of $340,000 and a revised anticipated construction cost of $8,462,764.

 28      Because of the increased construction cost, the developers could not comply with the conditions of the commitment letter, in that they could not bring the hard and soft costs of the projects, including the land, within the amount of $10,150,000.

 29      The developers had obtained an appraisal of the proposed project in June 2002 which valued the completed project at $12,220,000. The amount was based on the sum of the individual unit values only, assuming construction to be 100 percent complete and occupancy permits issued. No discount for an absorption period was allocated.

 30      Mr. Rai's evidence was that he performed his own calculation of the cost to complete the project based on the increased construction costs which indicated the cost to complete the project would be approximately $14 million including the land, marketing and interest costs.

 31      In December 2002, following the receipt of this information, the developers advised the plaintiff they were unable to comply with the condition precedent to obtain an unconditional commitment letter from their lender as due to the increase in construction costs they were unable to obtain the necessary construction financing.

 32      On January 22, 2003, the developers' lawyer sent a letter to the plaintiff advising him that the developers were unable to remove the subject clause in the purchase and sale agreement relating to their obtaining an unconditional commitment letter and that they would return the deposit funds upon the plaintiff executing a release.

 33      The evidence is that the developers advised the other purchasers to whom they had presold units that they were unable to complete the purchase and sales agreements and entered into releases with them and returned their deposits. All of the other purchasers have provided affidavits in which they depose that the developers made it clear that unconditional financing had not been obtained at the time they entered into the contracts and that in order to obtain the financing it was necessary to show a certain number of presales. They all depose that the developers had also made it clear that in the event unconditional financing was not obtained the project would not proceed.

 34      The following issues arise in this case regarding liability:

 35      The first issue is when was the deadline for the fulfilment of the condition precedent? The plaintiff argues that the condition precedent in the contract is ambiguous and that it does not mention a date in relation to when the unconditional construction financing has to be obtained. Any ambiguity in the contract should be resolved contra proferentum against the defendants as the party who prepared the agreement.

 36      In my view, there is no ambiguity about the date on which the conditions precedent had to be fulfilled. The clause in question refers to the vendors' lenders being satisfied that the purchaser is capable of purchasing the property and granting an unconditional commitment letter. The clause is clear that both conditions were to be removed by a fixed date which is set out in (a) as December 31, 2002; otherwise the contract shall become null and void and the deposit, together with any accumulated interest, will be refunded to the purchaser.

 37      Accordingly, I find that the condition precedent that the vendors' lenders grant an unconditional commitment letter to the vendors that construction financing has been approved was to be removed by December 31, 2002.

 38      Although the plaintiff says he did not read the 2002 contract prior to signing it and he was unaware of the condition, he initialled every page of the contract. He admits that he found an error in the contract which was changed and initialled.

 39      The plaintiff states in his affidavit that he speaks and understands the English language but it is a second language for him and he has difficulty with complex words and legal terms. However, he admitted that he was able to read and sign his affidavit without translation.

 40      As well, the plaintiff read the 2002 contract while on the witness stand in order to respond to questions. During his evidence, he initially stated that the defendants made him sign the 2002 contract. However, later on, he agreed that no one made him sign the contract.

 41      The plaintiff agrees that the defence of non est factum is not available to him. Any person who fails to exercise reasonable care in signing a document is precluded from relying on non est factum as against a person who relies upon the document in good faith: Marvco Color Research Ltd. v. Harris, [1982] 2 S.C.R. 774.

 42      The plaintiff is a sophisticated businessman who immigrated to Canada in 1974. Since immigrating, he has owned several businesses and developed a number of commercial properties. He was aware that the developers required financing in order to construct the building. The 2002 contract was signed on the same day the commitment letter was issued by HSBC. I find that the timing is not a coincidence, but planned and supports Mr. Rai's evidence that the plaintiff knew about the requirement to obtain financing to build the project. I did not find the plaintiff's evidence regarding his failure to read the 2002 contract or that he was unaware of the condition precedent regarding the requirement for construction financing credible.

 43      Rather I accept Mr. Rai's evidence that he provided the plaintiff with the 2002 contract three days prior to it being signed and that prior to signing it, the parties read it through together and discussed the various terms and that the plaintiff was well aware of the condition precedent regarding construction financing.

 44      The next issue is whether the defendants used best efforts to remove the condition precedent? Although the condition precedent does not include an express covenant on the part of the defendants to use their best efforts in fulfilling it, the defendants have conceded in their outline that they were to use best efforts. As well, it is apparent from the case law that courts will readily imply such a covenant in a contract in which there is a provision that one party is to perform as agreed or the contract will be void.

 45      In Dynamic Transport Ltd v. O.K. Detailing Ltd., (1978) 85 D.L.R. (3d) 19 (S.C.C.), in the context of a land sale agreement requiring subdivision approval which contained no provision as to which party should obtain approval, Mr. Justice Dickson stated:

 46      In Griffin v. Martens (1988), 27 B.C.L.R. (2d) 152 (C.A.), the court held in interpreting a clause "subject to a purchaser being able to arrange satisfactory financing", that the purchaser had a duty to use his best efforts to arrange satisfactory financing, notwithstanding that the condition was stated to be "for the benefit of the purchaser".

 47      The issue then becomes who bears the burden of proof that the defendants use their best efforts and how onerous is the burden?

 48      The plaintiff relies on M.J.B. Enterprises Ltd. et al. v. People's Food Market Ltd. (1979), 11 B.C.L.R. 130 (C.A.). The case deals with the sale of a parcel of land which was subject to the purchaser successfully obtaining rezoning of the land within a six month period which could be extended for an additional six months at the purchaser's option. The agreement required that the vendor co-operate with the purchaser. Before the expiry of the 12 months but after the expiry of the first six, the vendor approached the municipality and sought to have the property rezoned for a purpose inconsistent with the purchaser's application. The purchaser brought an action for specific performance and, alternatively, damages. The court found there was a breach of contract on the part of the vendor. However, the vendor argued, through no fault of its own, the purchaser's rezoning application was incapable of fulfilment before the end of the 12 month period because of the quasi-political process of obtaining rezoning.

 49      The court held at p. 138:

 50      BEM Enterprises Ltd. v. Campeau Corporation (1980), 24 B.C.L.R. 244 (S.C.), varied on other grounds (1981), 22 R.P.R. 240 (C.A.) also involved the interpretation of a condition precedent regarding zoning, in this case for a shopping centre expansion. The agreement for sale contained four conditions that were to be either waived or fulfilled by the defendant purchaser by certain dates. No waiver of the first two conditions was made by the purchaser by the specified date.

 51      Approximately four months before the expiry of the time limit for the other two conditions, the purchaser decided to abandon the idea of a shopping centre expansion and stopped all activities related to obtaining zoning approval. However, it did not inform the vendor of this decision until two weeks before the actual expiry date.

 52      The vendor sought specific performance or, alternatively, damages from the purchaser. Mr. Justice Toy held that there was an implied obligation on the purchaser to use its best efforts to bring about the fulfilment of the conditions in the agreement. The defendant had argued inevitable failure in this regard.

 53      Mr. Justice Toy held on the facts the defendant had not established whether it was inevitable that it would be unable to obtain the approvals based on an objective standard, which is to be applied as to whether or not a purchaser has fulfilled contractual obligations, stating at pp. 258-259:

 54      The plaintiff says that the defendants have failed to satisfy the onus on them to establish an objective basis that it would have been inevitable that they could not obtain an unconditional letter for construction financing from a lender by December 31, 2002.

 55      To that end, the plaintiff argues that there was no necessity to secure financing to construct the entire project and that they could have arranged financing for only the building in which the plaintiff's two strata units were to be located. However, Mr. Rai's uncontradicted evidence is that the project could not have been constructed in that fashion as the two buildings were interconnected and the development permit obtained for the project would not allow the type of modifications suggested by the plaintiff's counsel.

 56      The defendants had negotiated with numerous financial institutions prior to October 2002 when they obtained the commitment letter from HSBC. The evidence is that none of the other financial institutions would provide financing without the developers meeting certain conditions, which they could not meet. The developers have been advised that the banks would only finance between 60 and 65 percent of the hard and soft costs, including land.

 57      Although the plaintiff points to a letter from Delta Credit Union as evidence that financial institutions would lend up to 80 percent, Mr. Rai's evidence is that the Delta Credit Union was unable to provide financing for the project because it could not find another credit union to syndicate with. One of the reasons given to Mr. Rai as to why the Delta Credit Union could not find another credit union to syndicate with was because it was offering to finance too great a percentage of the project.

 58      The increase in construction costs between October and December 2002 resulted in the developers not being able to meet the conditions set out in the commitment letter. As well as not being able to meet the condition with respect to the construction budget, the developers were unable to meet the conditions regarding the presales. HSBC required confirmation that developers had presales of not less than 55 percent of the units for an aggregate purchase price of not less than $6,590,000, i.e. the amount the bank was prepared to advance for construction financing.

 59      The evidence was from Mr. Janda, a commercial realtor who had been approached by the developers in the fall of 2002 to locate buyers for the project, was that in November and December 2002, he advised the developers that although there was interest in the project, he could not locate buyers who were willing to make an offer until the developers were able to obtain subject-free financing. Many potential buyers voiced their concern that their deposit monies would be tied up indefinitely without secured financing for the project. He was unable to secure any firm offers for presales through his marketing efforts. By December 2002, the developers had not been able to achieve the required amount of presales.

 60      After receiving the information that costs were 40 percent higher than anticipated, the developers consulted the architect regarding changes to bring the cost down within the budget. On December 5, 2002, they received a letter from the architect advising them that the cost savings which could be achieved were only $340,000. In the same letter the architect advised them that their suggestion to change the building type to concrete tilt up construction would require a larger footprint, resulting in fewer parking stalls. As well, it would require a new development permit and working drawings. For the architect and the other consultants, it would require a redesign and redrawing of the project. The architect also anticipated City Hall's restrictive response because of the site being adjacent to single family and townhouse developments. As a result, the architect cautioned the developers that a radical approach to redesign to bring the costs down should only be undertaken after careful consideration.

 61      Following receipt of the architect's letter, the developers met with HSBC in the middle of December to ask it to advance the funds. Mr. Rai's evidence is that his request was half-hearted. However, given his experience in trying to obtain financing for the project and his knowledge that they were unable to meet the conditions, his expectation that the bank would refuse to advance the funds for the project was reasonable. The evidence is that the bank refused to advance funds.

 62      Although the plaintiff argues that the defendants should have called someone from the bank to confirm Mr. Rai's evidence, Mr. Rai's evidence was uncontradicted and given in a frank and forthright manner. As a result, I am not prepared to draw an adverse inference as suggested by the plaintiff.

 63      From the evidence, it is apparent that the defendants wanted to proceed with the project that they had been working on for over two years, but could not because they could not obtain the construction financing as a result of the cost of construction, which made the project unfeasible.

 64      Although the plaintiff argues that the defendants did not discharge their duty to use best efforts and they did not consult with any financial institutions to secure an alternative commitment letter or financing of any kind, the evidence is that the defendants had spent two and a half years attempting to arrange financing for the project.

 65      The defendants' expectation that they could not arrange construction financing with another financial institution between December 5, 2002, when they received the letter from the architect, and December 31, 2002, for a project which would cost more to build than they could sell for, is both reasonable and realistic.

 66      The plaintiff further argued that the defendants should have sought a new appraisal. However, an extensive appraisal had been prepared in June 2002, which valued the project at $12,200,000, with no discount for an absorption period, i.e. any delay in selling the units. Based on the information in the appraisal, the project was not feasible. There is no evidence to support the plaintiff's contention that the defendants could have obtained an updated appraisal for a nominal amount. Even if a new appraisal was obtained, the presales were already in place.

 67      Having considered all of the circumstances surrounding the transaction and the parties themselves, I find the defendants have established on a balance of probabilities that it was certain, inevitable, predestined and beyond doubt that an unconditional commitment letter that construction financing has been approved could not have been obtained on or before December 31, 2002.

 68      As well, having regard to all of the circumstances, I have concluded that the defendants used their best efforts to obtain unconditional financing. After receiving the commitment letter, they proceeded to tender the project to finalize the construction costs. Once they became aware of the results of the tender program, that construction costs were approximately 40 percent more than anticipated, they immediately contacted their architect to investigate the possibility of making changes to reduce the cost of construction. They explored the possibility of constructing a less expensive building type, i.e. concrete tilt up. They contacted the cost consultant to determine the reasons for the increase in costs and asked him to review the increase.

 69      Between October 16, 2002, when they obtained the letter of commitment and December 31, 2002, they contacted a realtor to assist them with the presales required by the commitment letter.

 70      Finally, despite knowing that they could not meet the conditions of the commitment letter, the developers met with the bank to determine whether the bank would provide the construction financing regardless of the fact the conditions were not met.

 71      Accordingly, I am dismissing the plaintiff's claim with costs to the defendants at Scale 3.

GEROW J.

QL UPDATE:  20040804
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