Buyers’ Obligations and Subject to Clauses
In this series of short articles, real estate lawyer Bruce Woolley considers “conditions precedent” clauses, often referred to as “subject-to” clauses. Does a contract exist before a subject to clause is removed? What should be considered when drafting a clause? What do you need to know about satisfying or waiving subject to clauses? Learn the answers to these and other questions in the Subject-to Series.
Many people are under the impression that real estate contracts with subject-to clauses are not binding until the subjects are removed. Some also believe that a subject-to clause is like a “get out of jail free” card for a buyer who changes his or her mind about a property and that the buyer doesn’t need to try to satisfy the condition. Not so — and here’s why.
Imagine that your buyer has made a valid offer, one that contains all of the essential terms (property, price and parties) and those terms and any other essential terms are clearly and sufficiently set out. Now, imagine that the seller has accepted the offer in the time frame and in the manner set out in the offer (see section 24 of the standard residential contract of purchase and sale). Finally, imagine that your buyer’s offer includes this subject-to clause: “Subject to the Buyer being able to arrange satisfactory financing on or before May 29, 2019.”
Is there a contract in effect before the condition is removed or waived? And does the buyer have any obligations during the subject removal period?
The answer to both these questions is: yes.
The Supreme Court of Canada has clearly stated in the Dynamic Transport case that a conditional contract is a binding contract, but the obligations of the party that benefits are contingent upon satisfaction or waiver of the condition. In other words, the buyer cannot simply sit back and do nothing, wait for the subject removal date and then say, “I was unable to remove the condition.” The party benefitting – in our case the buyer – must act in good faith and use best efforts to do what is necessary to remove the condition so that the contract can be performed.
Buyers who think they can use a “subject to” clause as a tool to keep a property off the market while they make up their minds, assuming that they need not do anything during the time period of the condition, are wrong. They are taking a risk, and a prudent licensee should advise their clients of this.
Buyers who fail to do anything and then fail to remove the subject to clause may find themselves being asked questions by the seller’s lawyer such as “give me a list of all of the financial institutions you visited to inquire about possible financing.” Ultimately, the buyers may find themselves in court, defendants in a lawsuit.
This was the case in a landmark decision of the BC Court of Appeal in 1988 – Griffin v Martens1. The contract contained the clause “subject to purchaser being able to arrange satisfactory financing on or before Friday, May 31, 1985.” The purchaser alleged he could not get financing within the time limit. But the Court found that the purchaser did not use best efforts and act reasonably, terms implied into the conditional contract by the Court. That means the purchaser had to look for financing, and if reasonable financing were offered, take the financing. The vendor was successful in suing the purchaser for damages.