Conditions precedent, commonly referred to as buyerʼs or sellerʼs subjects, are an essential tool in your toolkit to protect the client, allow for proper due diligence, and to help ensure the client’s expectations about the transaction are met.
It‘s important to remember, however, that subject clauses can have important legal consequences. In some cases, a poorly drafted subject clause can even have the effect of voiding the contract and rendering it unenforceable.
This was the result in the recent case of Pooni v. Storsley[i] (Pooni), in which the court held that a contract containing two subjectively worded subject clauses in favour of the purchaser rendered the agreement an unenforceable option to purchase rather than a binding contract of purchase and sale.
In Pooni, the sellers had entered into two contracts to sell their property to two separate buyers. The plaintiffsʼ offer was intended to be a back-up offer, which would become binding only if the first offer fell through. The sellers had agreed not to grant any extension in relation to the first offer, but they then granted the first buyers an extension on the date for subject removal. The plaintiffs alleged that in doing so, the sellers had breached their contract with the plaintiffs. Eventually, the plaintiffs purchased the property from the first buyers for $500,000 more than the price agreed upon in their original contract with the sellers. They sought this amount in damages from the sellers.
The sellers argued that certain subjects in the plaintiffsʼ offer were subjective, and that the fulfillment of the conditions was entirely at the discretion of the plaintiffs. The sellers argued that the subjects gave the plaintiffs the ability to walk away from the contract at their discretion with no recourse for the sellers. The sellers argued that, in the circumstances, the subjects had the legal effect of making the contract merely an option to purchase rather than a binding contract for purchase and sale.
The court agreed with the sellers and held that the parties never had a binding agreement. The court concluded that in order to make the agreement enforceable, the plaintiffs needed to provide additional consideration for the option to purchase beyond the purchase price of the property.
How can the wording of a subject void a contract?
Generally, contracts require at least three elements to be valid:
- agreement;
- intention, and
- consideration.
‘Agreement’ refers to a meeting of the minds about the terms of the contract. Both parties must also have the ‘intention’ to enter into a legally binding agreement. Finally, there must be an exchange of something of value from each party to the other as ‘consideration.’
Consideration often takes the form of an exchange of money for goods or services. Consideration can also take other forms – for example, agreeing to give another party a used car in exchange for painting your house would likely meet the requirement for consideration.
Consideration was the element at issue in Pooni. Because the subject conditions were subjective and enabled the plaintiffs to walk away from the offer on a whim, the plaintiffs needed to provide extra consideration in order to bind the sellers to the agreement.
The offending subject clauses were as follows:
Subject to the Buyer, at the Buyer’s expense, receiving and approving, on or before July 15, 2021, professional advice that there are no limitations unsatisfactory to the Buyer on the use or development of the Property resulting from the Riparian Areas Protection Act, its requisitions, or any similar legislation. This condition is for the sole benefit of the Buyer.
Subject to the Buyer on or before July 15, 2021, approving the feasibility of building a residence on the property in a commercially reasonable manner as contemplated by the Buyer, in its sole discretion. This condition is for the sole benefit of the Buyer.
[Emphasis added]
The court in Pooni canvassed the existing law, which holds that excessively subjective conditions create an option to purchase, rather than a contract for purchase and sale. In such cases, the law requires the party seeking to enforce the contract to show added consideration to bind the seller to the option. If there is no additional consideration, then the contract is not enforceable, and the buyer cannot recover from the seller for any alleged breach.
Can you get around the requirement for additional consideration?
As discussed in the reasons, one method of remedying a lack of additional consideration for the option to purchase is to have the offer “sealed” by the parties, in addition to being signed. The standard form contract of purchase and sale attempts to respond to this problem by including language to confirm that it is executed under seal. Clause 22 of the contract addresses this, and reads as follows:
22. ACCEPTANCE IRREVOCABLE (Buyer and Seller): The Seller and Buyer specifically confirm that this Contract of Purchase and Sale is executed under seal. It is agreed and understood that the Seller’s acceptance is irrevocable, including without limitation, during the period prior to the date specified for the Buyer to either:
-
- fulfill or waive the terms and conditions herein contained; and/or
- exercise any option(s) herein contained.
In addition, the standard form contract contains a purported seal next to each signature line for buyer and seller.
The court has previously considered clause 22 and has held that simply asserting that a contract is under seal is not enough to meet the requirement for additional consideration. The parties who signed the contract actually needed to apply a seal of some kind to the contract.
So what if clause 22 is included and the form has a symbol of a seal next to each signature, like in the Pooni case? The court in Pooni held that the seal on the form was insufficient to meet the requirement for a seal as contemplated in the case law. Past cases suggest that the seal must be consciously and intentionally applied by the parties to the contract in order to meet the requirement for additional consideration. The court said at paragraph 21:
…The digital seals in the Purchase Agreement were simply a pre-existing artifact included on the BCREA form and their presence on the form before the Purchase Agreement was digitally signed does not qualify as a deliberate application of a seal.
Essentially, in order to avoid having the contract declared unenforceable, the parties who sign the contract must deliberately affix their own seal to the contract with the intention and understanding that the seal is additional consideration for the buyer’s option to purchase. We aren’t aware of any case in BC where this has been done successfully in a modern real estate transaction. As a result, there is a great deal of uncertainty surrounding the form of seal which would be acceptable to the court, and in what circumstances the affixing of a seal would constitute additional consideration.
BCREA is addressing the issues raised in Pooni by making some changes to the language in the standard form Contract of Purchase and Sale; however, you should not rely on the seal to protect a contract with an overly subjective subject clause. If your client insists on including this type of subject clause, it would be best to direct them to seek independent legal advice before proceeding.
Avoid overly discretionary subject clauses
The best practice to follow in all cases is to avoid writing subject conditions that are subjective and that leave the enforceability of the contract entirely to the buyerʼs or sellerʼs discretion.
While the drafting process can be challenging, real estate licensees are expected to know how to draft enforceable agreements.
Luckily, there are resources to help you, including several articles about subject clauses in prior Risk Reports.[ii] You should also review and be familiar with the standard form subject conditions that are published in the BCFSA Knowledge Base. These clauses have been drafted with the benefit of legal advice in order to avoid the consequences that occurred in Pooni and they should be used verbatim, where appropriate. If you are dealing with an unusual situation for which there is no standard clause, and you are uncertain about the language to use, it’s a good practice to speak with your managing broker, or in some cases, to consult with a lawyer, before drafting the clause. Departing from tried and tested language is risky and can lead to unintended consequences.
In the rare case where your client actually intends to enter into an option to purchase, rather than a binding contract of purchase and sale, you should instruct your client to seek independent legal advice and recommend that legal counsel either draft or approve the language of the option.
[i] Pooni v. Storsley 2022 BCSC 1011
[ii] Deal or no deal: The cold hard truth about subject conditions; The pitfalls of the poorly draft contract; Subject clauses. Simple, right?; Subject clauses: Let’s make a deal
