Double Default Alive and Well

The world of real estate law produces a number of unusual rubrics that are far from intuitive, and, sometimes, even seasoned real estate lawyers forget some of the more obscure rules relating to real estate conveyancing. One of our favourites is the “Double Default Rule.” The Ontario Superior Court 2019 decision in Fortress Carlyle Peter St. Inc. v. Ricki’s Construction and Painting Inc. is an excellent showcase of how and when the Double Default Rule works.

Presume that you are a purchaser and the vendor has failed to deliver a critical estoppel certificate from a key tenant. You have a legitimate demand that the vendor will not satisfy, and that you are not prepared to waive. You want this deal, but you are not prepared to take it with the risk of a hostile long-term tenant. You are in a position to close the deal and want to force the vendor to comply with its obligations under the agreement of purchase and sale. Your lawyer tells you that you are in a good legal position…that is, however, until your accounting clerk tells you that the money you needed to close the deal was somehow lost in banking limbo (you know that you wired the closing proceeds, but your lawyer was frantically looking for the money in his/her trust account!). It is true that the vendor was not in a position to close the deal, but neither, it would seem, were you. Now what?!

Now, go across town and switch places with the vendor but using the exact same facts from the opposing perspective. You (remember, now you are the vendor) know you have to deliver an estoppel certificate, but, in your mind, you already have. The picky purchaser says your estoppel certificate isn’t exactly in the form required by the agreement of purchase and sale. Maybe the purchaser has a point, but you are sick and tired of this purchaser and, frankly, the markets have been good and you just as soon not close with this purchaser — you would do just as well, indeed probably better, going back to the market. Your lawyer says that your legal position isn’t really that strong but the lawyer will do what he or she can. While the odds are slim, who knows, maybe your dreams will come true and the purchaser won’t be available to close in any event. Guess what? The purchaser’s lawyer is not in funds on the closing date! It is true you were not in a position to close, but neither, it would seem, was the purchaser. Now what?!

This is, more or less, what happened in Ricki’s Construction, where the purchaser had requisitioned the delivery of an estoppel certificate that the vendor could not or would not deliver. The purchaser’s lawyer seemed to be in the driver’s seat until it was discovered that there were no closing funds in the trust account at the agreed-upon 6:00 p.m. closing. As it turns out, the bank had the money, but could not do the internal transfers necessary to get the money into the purchaser’s lawyer’s bank account during business hours on the closing date. For all intents and purposes, the purchaser in this case was arguably not in funds come closing, but the vendor was in no better position, having failed to deliver a critical estoppel certificate that was contractually required. Both parties were apparently in default on closing, and neither party was in a position to close.

Most real estate professionals, including many brokers and lawyers, think that this “double default” fact scenario results in a colossal crater — the deal has died because neither party was properly in a position to close. These real estate professionals would be spectacularly wrong. According to the Double Default Rule, where both parties are in default (and neither party is ready to close on the scheduled closing date), the deal is not dead. Instead, it is just postponed indefinitely, until resurrected by the first party who can come to the table with a reasonable new closing date. In the meantime, the deal is in “limbo” or “suspended animation” — the purchaser does not get its deposit back, and the vendor is not entitled to sell to anyone else. The widely accepted genesis of the Double Default Rule is an Ontario Court of Appeal decision from the early 1970s called King v. Urban & Country Transport, and the doctrine is often still often referred to as the “The Rule in King v. Urban” by older real estate lawyers.

In Ricki’s Construction, the bank finally got the closing funds into the purchaser’s lawyer’s trust account approximately 19 minutes after closing. After the usual nasty exchanges of recriminations and legal threats, the purchaser’s lawyer, now flush with funds, called for a new closing date on the very next day. Of course, the vendor disagreed, and, and the new closing date came and went with the vendor still stubbornly arguing that the deal had already died the day before. The court held that the new closing date was reasonable and that the purchaser was ready, willing and able to close on that new closing date: the purchaser won and the vendor lost. Although we have significantly paraphrased the “legal takeaway” from Ricki’s Construction, the case does re-affirm, some almost 50 years after King v. Urban that the Double Default Rule remains alive and well in Canadian real estate law.

Jeffrey W. Lem is a lawyer in the Ontario Public Service and bencher of Law Society of Upper Canada.
Jeffrey W. Lem is a lawyer in the Ontario Public Service and bencher of Law Society of Upper Canada.
Megan J. Lem is a corporate lawyer in the Toronto Office of Oslers LLP. This article reflects the personal views of the authors alone.
Megan J. Lem is a corporate lawyer in the Toronto Office of Oslers LLP. This article reflects the personal views of the authors alone.
You might also like

Comments are closed.

single-podcasts