Subject to good faith: Real estate vendors may not rely on discretionary conditions as a basis for accepting competing offers

In today’s real estate market, prospective purchasers may find themselves hastily making offers on properties, out of fear that someone else will beat them to the sale. To protect purchasers, realtors commonly include conditions in offers commonly referred to as ‘subject clauses’. Examples of common subject clauses include subjects to obtaining financing and inspection reports. Vendors will sometimes counter-offer with conditions of their own. If subject clauses are not waived or satisfied by the subject removal date, the parties to the offer can walk away from the deal as if it had never been entered into in the first place.

But what happens when a vendor accepts an offer and refuses to waive a condition because they subsequently receive a higher competing offer? This question was considered by the British Columbia Supreme Court in the recent decision of Zhang v. Amaral-Gurgel, 2017 BCSC 1561 and can be seen as a continuation of the Supreme Court of Canada’s decision in Bhasin v. Hrynew, 2014 SCC 71, which we previously commented on here.

In Zhang, the plaintiff purchasers sought specific performance of a contract to purchase a property in West Vancouver. The purchasers viewed the property on three occasions and had recently sold their own home prior to their negotiations with the vendor. The purchasers submitted two offers on the property. The vendor included in their counter-offer a condition that the terms of the contract be approved by the vendor’s lawyer. This counter-offer was accepted by the purchasers on a Saturday.

The vendor’s realtor arranged for the vendor to meet with a lawyer the following Monday. Before that meeting could take place, a competing purchaser viewed the property that weekend and offered to purchase the property at a higher price on the Monday morning.

The vendor met with her lawyer Monday afternoon and showed him the two offers. The vendor’s lawyer testified that he did not give the vendor any specific advice or recommendation that the vendor not proceed with her initial agreement. The lawyer recognized both contracts as being in the standard form used in British Columbia and did not suggest there was any difference in their legal effect.

Shortly after her meeting, the vendor sent a counter-offer to the competing purchaser, which was accepted that evening. The vendor then notified the initial purchasers that she would not be removing the subject clause in the initial contract. The initial purchasers removed their own subjects, tendered the deposit and sued the vendor for specific performance.

The Court found that the vendor’s lawyer had not made any explicit recommendations in which he gave or refused approval of the initial contract. The Court found that the vendor would have removed her subject clause had the intervening higher offer not been made on the Monday morning prior to the vendor’s meeting with her lawyer on the Monday afternoon.

The Court affirmed that vendors and purchasers have a duty of good faith in relation to their removal of subject clauses after an offer to purchase a property has been accepted. A vendor has a contractual obligation to act in good faith and take all reasonable steps to complete a sale.

The Court found that the intention of the parties was that the vendor would sell the property to the initial purchasers, conditioned only to her obtaining legal advice on the terms and conditions of that contract. The vendor, having obtained that legal advice, breached her contractual duty to act in good faith by not removing the condition based on the consideration of the merits of a competing offer received after the initial contract was signed.

The outcome of the Zhang decision has implications on vendors and purchasers in British Columbia’s real estate market, as the court may hold parties to their agreements. Vendors and purchasers may find that they cannot rely on subject clauses to escape their obligations under contracts of purchase and sale if they have not taken good faith steps necessary to remove their subject clauses or if they have taken those steps, but refuse to waive the subject clauses for unrelated reasons.

If you have any questions about your rights and obligations in a real estate transaction, please contact someone from our Real Estate group.