“Time is of the essence”: Lessons in Real Estate Transactions - Sewa More et al. v. 1362279 Ontario Ltd. and 3 Gill Homes Inc. v. 5009796 Ontario Inc.

By: Daniel Kraus & Joseph Ma

In real estate transactions, disputes can arise for various reasons, including seemingly straightforward elements of an Agreement of Purchase and Sale (“APS”), such as the date and time of closing. Two recent decisions released by the Ontario Court of Appeal have provided the public with direction on the interpretation of a “time is of the essence” clause found in an APS and deserve a deeper look. These cases are Sewa More et al. v. 1362279 Ontario Ltd., 2023 ONCA 527 and 3 Gill Homes Inc. v. 5009796 Ontario Inc., 2024 ONCA 6.

Sewa More deals with three separate but identical APSs for three neighbouring townhomes, and the failure of each transaction to close. According to the terms of the APS, the transactions were each scheduled to close on October 1, 2020, but ultimately could not be completed on that date as a result of delays in the purchasers’ obtaining financing. The APS provided for a boilerplate “time is of the essence” clause, but did not specify an exact time on October 1, 2020, by which the transaction was to close. This notwithstanding, the Vendor’s solicitor executed and delivered to the Purchasers’ solicitor, a Document Registration Agreement (“DRA”) stating “[if] the purchase agreement does not specify a closing time and a release deadline has not been specifically inserted, the release deadline shall be 6:00 p.m. on the closing date”. On the day of closing, the mortgagee was delayed in forwarding the mortgage proceeds to the Purchasers’ solicitor as a result of complications caused by the Covid-19 Pandemic. Upon receipt of the mortgage funds that day, the Purchasers’ solicitor attempted to wire the same to the Vendor’s solicitor, but ultimately the mortgage funds would only arrive in the latter’s trust account on the morning of October 2, 2020. At approximately 5:11 p.m., on October 1, the Vendor's solicitor wrote to the Purchasers’ solicitor terminating the APSs, alleging that the purchasers were unable or unwilling to close. In an attempt to salvage the transactions, the Purchasers’ solicitor explained the delay and sought an adjustment of the closing date to allow for the mortgage funds to be delivered, but the attempt was refuted by the vendor.

Both parties brought competing motions for summary judgment, with the Purchasers seeking specific performance of the three APSs, and the Vendor seeking a forfeiture of the deposits paid out by the Purchasers. In particular, the Vendor sought a strict application of the “time is of the essence” clause and a finding that the APSs were terminated, in that closing funds had to be tendered no later than 5:00 pm, being the cut-off time by which the Teraview System permits transfers to be completed. In their analysis, the Motion Judge found that, notwithstanding the terms of the DRA, a “time is of the essence” clause cannot be relied upon when no such specific time is provided in the APS. The Motion Judge also found that the Vendor was not entitled to rely on the "time is of the essence” clause because it acted unreasonably and in bad faith by prematurely cancelling the transaction and was clearly not willing to close on the agreed upon date. The evidence before the Motion Judge showed that the Purchasers were denied an opportunity to fully conduct a Tarion New Home Warranty Inspection, were refused a copy of the deficiency list from the Vendor, and that the Vendor did not sever the properties as required for their proper registration. Further, the Motion Judge determined that, during the pandemic, it was common for lawyers to work together to complete the rest of the closing steps after the closing of the Teraview System, but before midnight, on closing day.  

The Vendor Appealed to the Ontario Court of Appeal, which upheld the Motion Judge's decision, stating that it was open for the Motion Judge to find that purchase transactions would usually be honoured despite minor delays in the delivery of closing funds. The Court of Appeal also underscored that an innocent party must itself be ready, desirous, prompt and eager to carry out the agreement in order to take advantage of the “time is of the essence” clause. However, the Court of Appeal elected not to make a determination on whether, as a matter of law, a purchaser can rely on the fact that their counsel is in receipt of closing funds in order to cure minor delays in delivering the same to the Vendor, for that point was moot due to the clear repudiation by the Vendor of the APSs just after 5pm on October 1.

The Courts’ holistic approach in interpreting a “time is of the essence” clause as set out in Sewa More, might, at first glance appear to conflict with the rulings made by the Court of Appeal in 3 Gill Homes Inc. v. 5009796 Ontario Inc., 2024 ONCA 6, which decision was released only 5 months later. 3 Gill Homes Inc. concerns the purchase and sale of three new build properties between two sophisticated parties. The evidence showed that two of these transactions were completed as intended, and that the parties treated the closing date as flexible despite each involving APSs containing “time is of the essence” clauses.  In particular, the parties missed deadlines imposed by the two APSs that ultimately were completed. The remaining and subject transaction involved an APS that was amended to reflect a closing date of January 28, 2022, and include a “time is of the essence” clause such that the closing funds had to be transferred by   3:00 pm on closing day. The Vendor wrote to the Purchaser several times prior to the closing date providing reminders as to when the closing funds were due. On the day prior to closing, the Vendor sought an extension of 5 additional days, but was rejected. Further, on the closing date, at 2:47 p.m., the Purchaser’s solicitor wrote to the Vendor’s solicitor advising that the closing funds had been attained, but those funds would only be transferred at 3:35 p.m. The Vendor’s solicitor advised the Purchaser’s solicitor, at 3:10 p.m. that day, that their instructions were not to close the transaction due to the missed deadline, thus treating the APS as being terminated, but would not seek to keep the deposit.

The Purchaser therefore brought an Application seeking a declaration that the Vendor breached the APS, and that the same be deemed unconscionable. The Application Judge ruled in favour of the Vendor, and recognized that although the result seemed harsh, it was not unfair for the Vendor to enforce the payment deadline in light of the “time is of the essence” clause. The Application Judge further found that the amendment to the APS supported a departure from the parties’ conduct in respect of the previous transactions, which therefore could not be relied upon to undermine the clear deadline that was agreed to. Moreover, the Application Judge found the correspondence leading up to the closing date to support the seriousness of the deadline and the enforcement of "the time is of the essence” clause. Importantly, the Application Judge acknowledged the Courts’ residual equitable jurisdiction to relieve against the breach of a “time is of the essence” clause, but concluded that such power not be used absent unfair or unjust conduct by the party that seized upon said clause, as the Vendor appears to have done in Sewa More.

The Court of Appeal sided with the rulings of the Application Judge in 3 Gill Homes Inc., stating that “it would be an unwarranted intervention into the freedom of contract for a court to alter the APS and its closing time”.

The Court of Appeal’s decision in 3 Gill Homes appears inconsistent with the earlier, more liberal, approach taken by the Court to interpret the “time is of the essence” clause in Sewa More, but distinguishing factors between the two exist.  In Sewa More, the Court considered various factors in reaching their decision. Firstly, it recognized the context surrounding the delay in the Purchasers’ receipt of mortgage funds as a contributing factor to the failure to close the transactions on the scheduled date. The Court deemed this delay as not constituting a fundamental breach of the agreement, which influenced its more lenient interpretation of the “time is of the essence” clause. Additionally, the Court considered the Purchasers’ willingness to proceed with the transactions despite the delay. The Court emphasized that the purpose of the “time is of the essence” clause is to ensure that parties act diligently and in good faith to complete the transaction within a reasonable timeframe. In light of the Purchasers’ cooperative attitude and lack of any substantial harm caused by the delay, the Court concluded that it would be unjust to allow the Vendor to terminate the agreement.

Sewa More and 3 Gill Homes highlight the importance of having clear timelines in real estate agreements, and the potential consequences of failing to meet deadlines. The interpretation of the “time is of the essence” clause can vary depending on the specific circumstances of each case. Courts may take a more liberal or strict approach, considering contextual factors such as the nature of the breach, the reason for the delay, the parties' conduct, and the overall fairness of enforcing the agreement.

Buyers and sellers involved in real estate transactions should be aware of their contractual obligations and the implications of any delays. Seeking legal advice and guidance is highly recommended to understand the specific terms of the agreement and to navigate any potential disputes that may arise.