Subject clauses. Simple, right?
By Scott Cordell, Killam Cordell
Wrong. Subject clauses are, even for lawyers, one of the most complicated aspects of a contract of purchase and sale.
Is the subject clause in issue a true condition precedent such that no contract exists until the condition is fulfilled? Does it give the buyer (or less commonly the seller) a completely subjective right not to proceed with the transaction if they do not want to do so, such that the contract is really in the nature of an option? Or is it a clause which imposes an obligation to use “reasonable efforts” or “best efforts” to fulfil the subject upon the party intended to benefit from its existence?
These are complex legal questions that depend upon the precise wording of the contract and, in some cases, the circumstances surrounding its creation.
Before a cautionary tale, some advice—use the stock subject clauses recommended in the Professional Standards Manual, or provided by your brokerage. They have been drafted taking into account the lessons learned over time.
If an issue arises, and your client does not want to remove subjects drafted for their benefit, unless it is patently clear that it is not necessary, recommend that they seek legal advice immediately upon any indication they do not intend to remove subjects, and put that advice in writing. This is particularly so when your client does not want to remove subjects for reasons unrelated to the subjects. The following cautionary tale illustrates why.
A licensee prepares an offer. It includes typical subject clauses, making the contract “subject to” an inspection and financing. The client buyer, with some assistance from his agent, takes some initial steps to meet with banks about financing. The banks, not surprisingly, seek some information about the buyer’s financial position. Before it is provided, the buyer has an inspection of the property that reveals relatively minor defects, which the seller indicates they are prepared to fix.
It also leads to the buyer’s family members becoming concerned about spiritual aspects of the property. Subsequent inquiries confirm it is an estate sale, and the former elderly owner of the property died in the home. The buyer makes no further efforts to obtain financing, and instructs his agent that he will not purchase as he will not live in a home in which someone died.
What should the agent do? To avoid risk, the licensee should advise the client that they should seek legal advice before any position is expressed to the seller. If they do not do so, it is at their peril.
In the case of Harris v. Ye[i], a buyer in similar circumstances resiled from a transaction without the benefit of legal advice, believing the subject clauses provided protection. The seller estate “resold” at a $300,000 loss, and sued for the difference, taking the position that the contract imposed an obligation for the buyer to use good faith efforts to fulfil the subject terms.
The court agreed, on the particular terms of the contract, that the buyer had such an obligation and did not fulfil it, given he had abandoned efforts to find financing upon becoming concerned about the spiritual aspects of the property.
Judgment was awarded in favour of the seller, leading to a claim by the buyers against their agent, alleging, among other things, that the licensee had communicated a repudiation of the contract without advising of the risk of doing so, or recommending legal advice. While the claim was eventually resolved, the licensee was embroiled for years in litigation.
The Harris case was decided without reference to the Supreme Court of Canada’s decision in Bhasin v. Hyrnew[ii] (which had only recently come down), in which the court found, using several cases dealing with subject clauses in its analysis, that there was an implied duty of good faith in the performance of a contract.
This decision has already been relied upon by a BC Court in Zhang v Amaral-Gurgel[iii], where it was found that a seller could not use a subject clause allowing their counsel to review the contract of purchase and sale to resile from the transaction and accept a later-received, higher offer.
Bottom line: Issues related to subject clauses are complex. Use the standard clauses, and strongly consider recommending legal advice in circumstances where your clients give an indication they may wish to resile from a transaction on the basis of a subject clause, particularly if it does not appear to be a legitimate reason.
[i] Harris v Ye (2015) Unreported Vancouver Registry #S138347
[ii] Bhasin v Hyrnew, 2014 SCC 71
[iii] Zhang v Amaral-Gurgel, 2017 BCSC 1561
*For additional information on subject clauses, see also Scott Twining’s article “Subject Clauses: Let’s Make a Deal” in the May 2014 Risk Report.