In real estate transactions, subject clauses are commonly included in purchase and sale agreements to protect purchasers and vendors alike.
Clauses such as “subject to home inspection,” “subject to obtaining satisfactory financing,” and “subject to lawyer’s approval” provide purchasers – who may have hastily submitted an offer – with an opportunity for sober second thought. Black’s Law Dictionary defines this rushed decision making as “Buyer’s FOMO” – a fear of missing out.
Ultimately, if such clauses are not waived or satisfied by the conditional date, the deal is dead and the parties can walk away without liability.
But what are the obligations of a party seeking to rely on a subject clause to walk away from a deal? Can a seller decline to waive a condition that makes the terms and conditions of an accepted offer subject to a lawyer’s approval, simply because the seller has received a competing offer?
The answer, the Supreme Court of British Columbia recently ruled, is no.
A better offer
In Zhang v Amaral-Gurgel, the defendant seller entered into a contract with the plaintiffs to sell her residential home in West Vancouver for $5.8 million, with a $260,000 deposit. The contract included the following subject clause:
Subject to the Seller’s legal/representative lawyer approving the terms and conditions of the contract on or before October 17, 2016.
Shortly before the seller met with her lawyer, a second buyer submitted a higher offer of approximately $5.9 million, with a higher deposit and an earlier closing date.
The seller reviewed both offers with her lawyer, and shortly thereafter sent a counter offer to the second competing purchaser, which was accepted. The seller then notified the initial purchasers that she would not be removing the ‘subject to lawyer’s approval’ clause and would not proceed with the sale.
The initial purchasers removed their own conditions, tendered and sued for specific performance. Both purchasers sued the seller, each claiming to have purchased the property.
At issue was whether the defendant seller was entitled to escape the first offer and accept the second offer by relying on the lawyer’s approval condition.
Consistent with a landmark Supreme Court of Canada decision (Bhasin Hrynew, 2014 SCC 71), the B.C. Court confirmed that where an agreement of purchase and sale is subject to one of the parties (in this case, the seller) obtaining approval from a third party, such party is under a common law duty to act reasonably and in good faith to obtain the approval and complete the sale. They can not act in an “arbitrary or capricious” manner.
Ultimately, the Court held that the defendant seller, by purporting to rely on the lawyer’s approval condition to consider and accept a subsequent competing offer, had failed to act in good faith and was in breach of the initial contract.
Thus, the Court ordered specific performance of the first contract, meaning the Defendant had to honour the first offer (exposing her to a claim for damages by the second purchaser).
The Court’s decision in Zhang turned on the interpretation of the lawyer’s approval condition.
Interestingly, the Court compared the subject clause to the lawyer’s approval condition considered by the Alberta Court of Appeal in Castledowns Law Office Management Ltd v Fastrack Technologies Inc., in which Justice Slatter (in dissent) rejected submissions that the lawyer’s disapproval must be based on “purely legal considerations.” According to the dissenting judge in Castledowns, clients “routinely consult their lawyers not only about legal matters, but about business matters, family matters, and personal issues,” such that the “boundary between ‘purely legal issues and other matters on which lawyers are consulted is impossible to define.”
Noting that such “wide-ranging consideration” may be permitted by a subject clause in some cases, the Court found that such consideration was not permitted by the more narrow language of the lawyer’s approval condition in this case, which expressly limited the solicitor’s approval condition to the “terms and conditions of the contract.”
Thus, the scope of solicitor’s approval clauses, and whether such clauses extend beyond the “purely legal” remains unclear. What we do know, following Zhang, is that whether a party has acted reasonably and in good faith in relying on such a clause will depend on the intention of the parties as disclosed by the contract.
Consequently, parties seeking to rely on the wide-ranging advice of their lawyers (including with respect to business terms) should ensure that a solicitor’s approval clause is broadly worded to encompass such matters, or risk a finding that they have relied on the clause in bad faith.
At the very least, a solicitor’s approval clause should not be limited only to approval of “the terms and conditions of the contract.” Conversely, parties should insist that any limits to a subject clause by the other party be expressly stated in the contract.
For more information, contact our Commercial Litigation Group.