Several issues can arise before or after a real estate transaction has been completed, leading to a dispute. For example, the purchaser may be unable to obtain the required financing, or the vendor might back out of the deal if they later find another purchaser willing to pay a higher price.

This article looks at the recent decision of the Court of Appeal for British Columbia in Khela v. Clarke. In this case, purchasers of a residential property sought specific performance of the contract when the vendor decided not to proceed with completion. The case shows that courts don’t look kindly on those who seek relief but have behaved dishonestly.

Vendor and purchasers enter contract for 4.3-acre lot in Anniedale-Tynehead 

The vendor put his residential property on the market in March 2017. It is a large log house on a 4.3-acre lot in the Anniedale-Tynehead area of Surrey that also features a guest house, tennis court, swimming pool and gardens with koi ponds.

A builder and property developer, assisted by his real estate agent son, entered into negotiations to purchase the property. The son drafted an agreement based on a standard form real estate contract, with a stated purchase price of $4 million. The purchasers were required to pay a non-refundable deposit of $500,000, and completion was set for mid-2019.

The contract also contained a price adjustment clause, which provided that the final purchase price was based on the developable area and that any area of the land that remains as wetlands or green infrastructure would not be included in the calculation of the final sale price. 

Purchasers seek specific performance, drive down purchase price

In April 2019, the purchasers accepted a $3.5 million loan to complete the purchase of the property. They knew the loan had been approved based on the property having been appraised at $8 million.

Shortly after, the son claimed to be in communication with another lender that reportedly would not lend more than $1.5 million based on its investigation into the property’s usable area. In May 2019, just prior to completion, the vendor’s solicitor received a statement of adjustments with a $1.36 million downward adjustment to the purchase price to reflect 1.5 acres of the property not being developable due to “green infrastructure and ditch set back”. 

The vendor refused to complete the sale. The purchasers sought specific performance of the contract or, in the alternative, damages for breach of contract. They sought the difference between the value of the property on completion day less the purchase price and tendered a $7.74 million appraisal.

What is specific performance?

Specific performance is an equitable remedy obtained through the court that requires someone to do a particular action. Most commonly, an order of specific performance forces a party to fulfil its obligations under a contract. It is granted at the court’s discretion where damages are deemed to be an inadequate remedy.

Specific performance is often sought in real estate disputes. Due to the unique nature of land and property, damages may not be sufficient to remedy the harm suffered by the innocent party. For example, it might take considerable time and cost for the innocent party to find a property with comparable features in a similar location.

Price adjustment clause cannot be severed; Court declares entire contract void

The trial judge found that the term “developable” in the price adjustment clause was ambiguous – it was not defined, its ordinary meaning was of no assistance, and the parties’ conduct did not provide a basis to understand its meaning. The judge found that the clause could not be severed from the contract and, as a result, the entire contract was void and therefore could not be enforced by the purchasers.

Justice of Appeal Frankel, speaking for the Court of Appeal, agreed. His Honour explained that the essential terms of a contract for the sale of land are certainty of parties, the certainty of property and certainty of price. It was open to the judge to find that the parties intended that the price adjustment clause was the method by which the final purchase price was determined. This could not be done because of its ambiguity.

Purchasers did not come to court with “clean hands”

The trial judge decided that the purchasers acted in bad faith and with dishonesty in dealing with the vendor. This meant that even if their claims for equitable relief were established, they were disentitled to relief because of the “clean hands” doctrine. 

The judge found that the purchasers had a “long-term bad faith plan” to seek to reduce the purchase price just prior to completion. The information from the second lender raised serious concerns while knowing they had financing in place from another lender who had appraised the property at $8 million.

Justice of Appeal Frankel agreed, concluding:

It is clear from the judge’s findings that the [purchasers] included the [price adjustment clause] in the contract, intending to hold it in their back pocket so that they could use it at the eleventh hour to drive the price down.

The Court of Appeal dismissed the purchasers’ appeal, and the vendor was only required to return the $500,000 deposit. 

Contact Meridian Law Group in Vancouver for Representation in Real Estate Disputes

At Meridian Law Group, we provide skilled representation to sellers and purchasers in a variety of residential and commercial real estate litigation matters. Our real estate litigators strive to understand clients’ needs and develop focused legal strategies to quell their concerns. We advocate for clients’ rights and take swift, decisive legal action to protect their legal and financial interests under real estate agreements. We will explore all opportunities for early settlement of a dispute while always positioning you for success in any dispute resolution process, including negotiation, meditation, arbitration, or litigation.

Located in downtown Vancouver, Meridian Law Group proudly represents clients throughout West Vancouver, North Vancouver, Coquitlam, Penticton, Kelowna, Richmond, New Westminster, Burnaby, Surrey, Langley, and White Rock. To arrange a confidential consultation for your real estate dispute, please call 604-687-2277 or reach out online.