Can sellers include an “escape clause” in an Agreement of Purchase and Sale (“APS”) that allows them to look for a better offer while the initial purchaser satisfies certain conditions in the APS? The Ontario Supreme Court recently concluded in Grayson v. Creasy, that while sellers are entitled to include an escape clause in an APS, they must strictly comply with its terms.
Buyers Looking For Large Home
In January 2021, the applicant purchasers saw that the defendant sellers’ home (the “Property”) was for sale. The applicants had been looking for a larger home to accommodate their growing family and the Property had many of the items they were looking for: a larger house in the same neighbourhood in the same school district with a pool in the backyard. The applicants made an offer of $530,000 which the respondents accepted, and the parties entered into an APS with a closing date of March 19, 2021.
The Escape Clause
While the APS was a standard Ontario Real Estate Association form, it contained three conditions. The first condition gave the applicants the option to void the APS if they were unable to obtain mortgage financing. The second condition gave the applicants the option to void the APS if they were unable to obtain a satisfactory air quality test. The third condition included an “escape clause” for the respondents, allowing them to continue marketing the property for sale after signing the APS and continue to look for a better offer until the applicants waived the conditions in the APS. The clause specifically stated as follows:
Provided further that the Sellers may continue to offer the property for sale and, in the event that the seller receives another offer satisfactory to the Seller, the Seller may so notify the Buyer in writing by delivery to the Buyer personally or in accordance with any other provisions for the delivery of the notice in this Agreement of Purchase and Sale or any Schedules thereto. The Buyer shall have 24 hours from the giving of such notice to waive this condition by notice in writing delivered to the seller personally or in accordance with any other provisions for the delivery of notice in this Agreement of Purchase and Sale or any Schedules thereto, failing which this Offer shall be null and void, and the Buyer’s deposit shall be returned in full without deduction.
The respondents did, in fact, receive a better offer of $703,000. On February 7, 2021, they entered into an agreement with the second buyer, with a closing date of March 19, conditional on the respondents being released from the APS with the first buyers, the applicants.
The respondents, advised by their realtor, emailed the applicants on February 9th, 2021, stating that the applicants had 24-hours to remove their conditions “or walk away from the deal.”
In order to secure their ability to purchase, the applicants waived the conditions by signing and serving a Notice of Fulfillment of the mortgage financing and air quality tests. The applicants and their lawyer followed up with the respondents to confirm receipt but never received a response.
After the 24-hour window expired, the respondents told the applicants that the APS was null and void because they had only waived the mortgage and air quality conditions and had failed to waive the “escape clause.” It was the respondents’ position that they could go forward with the sale to the second purchaser.
The applicants allowed the respondents to complete the sale to the second buyer but claimed damages for the breach of the APS.
The Respondent’s Breached the Agreement of Purchase and Sale
The court noted that “at first blush, one might be inclined to agree with the respondents.” However, this position was overturned by the wording of the escape clause and common sense. The court found that the first two conditions were included for the benefit of the applicant and could only be waived by the applicant whereas the third condition, the “escape clause,” was included solely for the benefit of the respondents. In the court’s view, once the respondents triggered the escape clause if the applicants waived the first two conditions within 24 hours, the APS became binding on both parties. The purpose of the escape clause was to force the applicants’ hand, which is exactly what it did. The respondents agreed to the original offer, then “lit the fuse” when they received a better offer. The applicants were not required to expressly waive the escape clause nor were they required to agree to pay the amount offered by the second buyer. The court concluded that the respondents’ interpretation of the contract was untenable, and they, therefore, breached the APS and the applicants were entitled to damages.
Given that the second buyer offered to pay $173,000 more for the Property, the court determined this figure to be the proper starting point for the measure of damages. Had the APS not been breached, the applicants would have paid $530,000 for a home that was apparently worth $703,000.
With regards to mitigation of damages, while disappointed buyers seeking damages are typically required to mitigate their damages by making diligent efforts to find a substitute property, in this instance, the court was not satisfied that there was sufficient evidence that the applicants had a duty to mitigate. With no evidence on the record as to whether the applicants eventually sold their home to purchase another property and whether their home had appreciated in value while they waited, the court directed that reference be conducted to calculate the applicants’ damages.
This case serves as a reminder that while an APS may contain an “escape clause,” allowed a seller to look for a better offer while a first buyer satisfies conditions, sellers must comply with the specific provisions of such an escape clause, or they may be liable for damages for failure to sell to the initial purchaser.
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