An Important Lesson for Buying Real Estate Assets – Real Estate and Construction

A recent decision from British Columbia’s highest court underscores the importance of sticking to the wording of a sales contract and retaining a lawyer who can do the job, especially when it comes to to buy regulated real estate.

In Sutter Hill Management Corporation v. Mpire Capital Corporation, the purchase and sale of a specialty property went awry after the buyer’s attorney determined he lacked the expertise to complete a regulatory aspect of the transaction. The resulting delay caused the sale to fail and the buyer, in turn, ended up losing a substantial deposit.

The purchase-sale contract

In January 2016, Mpire Capital Corporation (the buyer) entered into a purchase and sale agreement (the APS) to purchase a care home from Sutter Hill Management Corporation and Sweet Investments Ltd. (the sellers) for $14,125,000. After the execution of the APS, the buyer paid a deposit of $300,000 on the purchase price.

The APS was amended in July 2017 to include a clause stating that the purchaser was required to “use its commercial best efforts” to acquire all necessary licenses and approvals from the Fraser Health Authority (the FHA) “as soon as as possible”. The closing date of the transaction was considered to be 30 days after the date the buyer obtained the regulatory approvals and transfer of licenses from the FHA.

After execution of the modification, the buyer took steps to obtain regulatory approvals in the following months. On November 8, 2017, the FHA sent the buyer a number of draft agreements that needed to be signed as part of the approval process.

A few weeks later, the buyer’s attorney informed the sellers that he did not have the expertise to advise the buyer on FHA agreements and he withdrew on November 20, 2017. The buyer retained the services of another lawyer on November 24, 2017.

On November 27, 2017, the sellers delivered a notice of default to the buyer, stating that the buyer violated the APS for failing to use its “best efforts” to obtain FHA approval as agreed. The defect notice stated that the buyer had taken too long to return the agreements to FHA and a deadline of December 12, 2017 was given to remedy the defect.

As of December 14, 2017, the buyer had not yet returned the agreements to FHA. The sellers therefore declared that the APS was complete and took the position that the buyer’s deposit was accordingly forfeited.

The sellers then filed a lawsuit to retain the deposit.

Court decision overturned on appeal

The judge hearing the application in the Supreme Court of British Columbia disagreed with the sellers.

The judge found that since the buyer had hired a new attorney on Nov. 24, 2017, to review the FHA agreements, there “simply wasn’t enough time” for the new attorney to “immediately engage.” in the process”. It was therefore deemed “commercially reasonable” for the buyer to wait for their new lawyer to advise on the agreements and the buyer was not held responsible for the resulting delay.

The sellers appealed the decision and argued that the motions judge erred in finding that the buyer had in fact made “commercially reasonable best efforts” to obtain timely FHA approval. The British Columbia Court of Appeal agreed with the sellers in this regard.

The court held that, in determining what is meant by the words “commercially reasonable best efforts” and “as soon as possible”, the entire agreement and the circumstances surrounding it must be considered. It was noted that the lower court erred in looking at this issue in too narrow a context.

The appeals court said that by agreeing to obtain FHA approval “as soon as possible” and using “commercially reasonable best efforts” to do so, the buyer was obligated to “do whatever ‘it could reasonably do to obtain the necessary approvals as soon as possible, except for such measures as would be commercially unreasonable’.

As such, it was noted that the time it took for the FHA to grant approval was irrelevant, as it could take no action until the agreements were returned to it. By not returning the FHA agreements in a timely manner, the buyer was the one responsible for the delay in the process, as they could not explain why they had not taken any concrete action between the time the agreements were received and the delivery of notice. of default.

It was also held that the buyer’s need to retain the services of another lawyer did not excuse him from closing the transaction in a timely manner.

The motions judge’s decision was therefore reversed and the deposit was ordered to be returned in full to the sellers.

The implications for buyers and sellers

Buyers and sellers would be wise to pay close attention to this decision and its potential implications.

Phrases such as “commercially reasonable best efforts” do not have a clear meaning and will always depend on the specific context of the transaction. However, when entering into an agreement with this wording (or similar wording), buyers must still be able to demonstrate that they are acting as quickly as possible to complete the transaction and they must also be able to explain any delay.

Additionally, perhaps most importantly, it is essential for buyers to retain the services of a lawyer with the necessary expertise for complex real estate transactions. This is especially true in cases such as this, which involve the purchase of specialized assets and the associated regulatory hurdles.

If a lawyer finds himself overwhelmed, it could end up jeopardizing the deal.

Originally posted by Real Estate News Exchange.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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