BC COURT CONFIRMS DUTY OF GOOD FAITH
IN CONTRACTS FOR THE SALE OF PROPERTY

September 22, 2017

Peter B. Gorgopa

A seller’s right to terminate a contract of purchase and sale of residential property by declining to remove or waive a condition was considered recently by the Supreme Court of British Columbia in Zhang v. Amaral-Gurgel, 2017 BCSC 1561.  In that case, the defendant seller agreed to sell her home to the plaintiff.  The contract was on the standard form used for residential real estate transactions in BC, and a subject clause was inserted that read:

Subject to the Seller’s legal representative/lawyer approving the terms and conditions of the contract…This condition is for the sole benefit of the Seller…

Before the seller was able to meet with her lawyer, she received a competing offer from another potential buyer. The new offer was in the standard form, and had a higher price, higher deposit, and earlier closing than the contract made with the plaintiff.  The seller met with her lawyer and reviewed with him both the contract and the new offer. During the meeting, the seller decided that she did not want to proceed with the contract. The court found, however, that the lawyer did not give the seller any specific advice or recommendation to that effect, nor did the lawyer suggest there was any difference in the legal effect of the two documents.

Subsequent to the meeting with the lawyer, the seller presented a counter-offer to the new buyer, which was accepted. After the new buyer accepted the counter-offer, the seller notified the plaintiff that the seller would not remove or waive the lawyer’s approval condition, thus terminating the contract. The plaintiff sued the seller and was awarded specific performance of the contract.

The court held that when, as in this case, a contract is subject to the seller obtaining the approval from a third party, the seller is under a duty to act reasonably and in good faith to obtain the approval and complete the sale, and to not act in a capricious or arbitrary manner. The question of whether the seller has acted reasonably and in good faith depends on the nature of the condition and the intention of the parties as disclosed by the contract.

With respect to the interpretation of the lawyer’s approval condition, the court held that the considerations relevant to the lawyer’s approval of the contract were prescribed by language that limited the condition to “terms and conditions of the contract”. In the opinion of the court, the seller was entitled to obtain legal advice on the meaning of the contract, the seller’s rights and duties under it, and any legal issues that might arise, and to consider those objective factors honestly and in good faith in her subjective assessment of them. However, the language used to express the lawyer’s approval condition could not be interpreted to include or extend to the seller seeking advice on or considering the relative merits of another offer that was received only after the contact was signed. By purporting to rely on the lawyer’s approval condition to consider and accept a subsequent competing offer, the seller failed to act in good faith and was in breach of the contract.

This case illustrates the importance of the facts surrounding the termination of a contract, and the risks inherent in relying on the failure to remove or waive a condition as a means to terminate the contract. A party must act reasonably and in good faith with respect to the removal of a condition. The result in this case may have been different if the lawyer’s approval condition had been worded more broadly to encompass wide-ranging advice on what was in the seller’s best interests, or if the seller otherwise had an objective basis for using the lawyer’s approval condition to terminate the contract.

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