Your client just closed on the purchase of a small but successful business. The vendor owns the property but it’s ok; your client has an option to purchase and in a few years of building the business they can close on the property too.
A few years pass and the business grows. The option date arrives, your client tries to exercise it, and … nothing. Your client tenders but the vendor refuses to sell. Now what? Your client has a claim for specific performance but that is not a great position to be in.
The test for specific performance
When deciding whether to order specific performance the court has to consider:
- the nature of the property;
- the adequacy of damages as a remedy; and
- the behaviour of the parties, having regard to the equitable nature of the remedy.
The question of the adequacy of damages is related to the nature of the property but also takes into account factors such as the difficulty in enforcing a damages award.
Finally, the court will consider how the parties acted. Courts have refused to award specific performance for a wide variety of conduct including misrepresentations made in court on a motion, fraud, or delivering improper requisitions.
Even if the claim is ultimately successful, the litigation can go on for years and will be costly. There are many issues a defendant can throw up to avoid selling the property.
Is there a way to avoid these delays and costs?
There is a tool commonly used in the secured lending world that may assist purchasers in obtaining orders for specific performance.
Briefly, what is secured lending?
A secured loan is a loan that is secured by the assets of a business. If the borrower defaults, the lender can seize the assets and sell them to satisfy the debt. While a lender can seize and sell the assets itself most lenders don’t do this for two reasons.
First, most lenders are not in the business of seizing and selling assets. They do not have the expertise to sell assets.
Second, while the security is over the assets, the assets are often worth significantly more if sold as a going concern (i.e. all together as a functioning business) than individually. This is a legal example of the whole being greater than the sum of the parts.
How does a lender deal with these problems?
When deciding whether to appoint a receiver the court considers many factors, including:
- whether irreparable harm might occur if no order were made;
- the nature of the property;
- the waste of the debtor’s assets;
- the balance of convenience to the parties;
- the fact that the creditor has the right to appoint a receiver in its loan agreement;
- the principle that the appointment of a receiver is extraordinary relief that should be granted cautiously and sparingly;
- the conduct of the parties;
- the cost to the parties; and
- the likelihood of maximizing returns.
These are not the same factors that are considered by a court when deciding whether to grant specific performance but many factors are similar – the nature of the property, the conduct of the parties, maximizing returns.
Using acknowledgments and consents in forbearance agreements
When a debtor defaults but before a receiver is appointed it is common practice for the parties to enter into a forbearance agreement. The forbearance agreement will set out certain terms such as an acknowledgement of the debt and the default, an acknowledgement that the lender has taken the necessary steps (such as giving notice) to appoint a receiver and an acknowledgment that the debtor is asking for additional time to remedy the default or pay out the loan. In exchange for these acknowledgments the lender will agree not to enforce its right (i.e. to forbear) and instead to give the debtor additional time.
While the acknowledgments are useful, they are often not the most important part of a forbearance agreement. These acknowledgments are useful if the debtor defaults on the forbearance agreement but they still put the lender back in the same position of trying to appoint a receiver which means satisfying the court of the factors set out above.
To avoid this problem, most, if not all, forbearance agreements contain a consent to judgment and a consent to the appointment of a receiver. The consents are held in escrow and can only be relied upon if the debtor fails to pay or otherwise defaults on the forbearance agreement or underlying loan.
The effect is that, if the debtor does default, the lender relies on the consents to get judgment and an order appointing a receiver. The common practice is to prepare an application record that sets out the default and explains why a receiver should be appointed (i.e. to deal with the factors set out above) but ultimately to rely on the consents.
How does this apply to a real estate transaction and specific performance?
Like the appointment of a receiver, specific performance is a discretionary remedy. The court can, but does not have to grant it.
There are three things you can do to make it easier for the court to grant the order your client needs:
- Get the vendor to acknowledge in the agreement of purchase and sale that the property is unique and damages are not an adequate remedy if the vendor breaches the agreement. Ideally list the specific ways in which the property is unique and the specific ways in which damages are inadequate.
- Ask the vendor to consent to an order for specific performance in the agreement of purchase and sale. Once your client has an order requiring specific performance of the agreement of purchase and sale, the vendor is required to close the transaction.
- In an ideal world, get a consent to a vesting order which can be taken out upon payment of the purchase price. The vesting order can be registered on title and will transfer title without the vendor being involved at all.
The acknowledgments in point 1. above is the key protection. Even if the vendor consents to a vesting order or an order for specific performance the court may decide to make its own assessment. If this happens you are back to litigating the three issues for specific performance but it will be much harder for the vendor to argue that the property is not unique and damages are adequate when faced with the acknowledgments.
Ultimately specific performance is discretionary. There is no guarantee that the court will rely on the consents or accept the acknowledgments. However with these in hand your client is in a much better position if a vendor breaches an agreement of purchase and sale.
At KMB, we combine the expertise of our many practice groups to litigate strategically, save time and costs and give our clients the best chance of winning.
 Landmark of Thornhill Ltd. v. Jacobson, 1995 CanLII 1004 (ON CA)
 Saeed v. Gunarajah, 2018 ONSC 4590
 Sivasubramaniam v. Mohammad, 2018 ONSC 3073
 Silverberg v. 1054384 Ontario Limited, 2008 CanLII 59325 (ON SC) (“Silverberg”)
 Masson v. Shaw (1922),  S.C.R. 187 (S.C.C.); Henderson v. Thompson (1909), 41 S.C.R. 445 (S.C.C.)
 Majak Properties Ltd. v. Bloomberg (1976), 13 O.R. (2d) 447 ONHC)
 R.S.O. 1990, c. C.43, section 101
 R.S.C., 1985, c. B-3, section 243
 Houlden, Lloyd W. et al, The 2019 Annotated Bankruptcy and Insolvency Act (Toronto: Carswell, 2019), L3, citing Textron Financial Canada Ltd. v. Chetwynd Motels Ltd. (2010), 2010 CarswellBC 855, 67 C.B.R. (5th) 97 (B.C. S.C.) [In Chambers])