Number 497, October 2017
When is a party justified in refusing to remove a subject clause?
A subject clause typically benefits one party or another. At common law, that party must, in good faith, make all reasonable efforts to remove their subject clause. In the standard form Contract of Purchase and Sale, the contract terminates if a party fails to give written notice removing their subject clause by the subject removal deadline.
Wording matters, too. One may only refuse to remove a subject clause for a reason tied to the language of the clause. A buyer may not decline to remove her subject to financing clause merely because she's found another property she likes better. According to the Real Estate Council of British Columbia,1
The seller is best served by getting a substantial deposit when the parties first enter the agreement … If the buyer fails to use his or her best efforts to remove the subject clause, the buyer will be in breach of the implied term of the agreement that requires the buyer to act in good faith. If so, the seller may keep the deposit on account of damages … .
In Zhang v. Amaral-Gurgel, the issue was whether the seller breached the contract when she refused to remove her subject clause.2
On October 15, 2016, the seller entered a contract to sell her residential property to the first buyers for $5.8 million, with a $260,000 deposit. The contract included this subject clause:
Subject to the Seller's legal representative / lawyer approving the terms and conditions of the contract on or before October 17, 2016. This condition is for the sole benefit of the Seller.
Shortly before the seller met with her lawyer on October 17, a second buyer submitted a higher offer of $5.968 million, with a $400,000 deposit and an earlier closing date.
The seller showed the lawyer her contract with the first buyers as well as the second buyer's offer. According to the lawyer, the seller's overriding concern was what might happen if the first buyers failed to complete, so the lawyer mainly discussed the seller's legal remedies. The seller never specified any reason for her concern. The lawyer also compared the two deals, but never expressly approved or disapproved the terms and conditions in the seller's contract with the first buyers.
After meeting with her lawyer, the seller sent a counter-offer to the second buyer for $5.98 million ($180,000 more than the first buyers' contract), which the second buyer accepted. Apparently, the contract with the second buyer was not subject to the collapse of the first buyers' deal.
The seller purposely did not communicate with the first buyers until she knew the second buyer had accepted her counter. Then the listing agent told the first buyers' REALTOR® that the seller wouldn't remove her subject to lawyer's approval clause in her contract with the first buyers, but the first buyers refused to accept that their deal was at an end.
Both sets of buyers sued the seller, each claiming to have bought the property.
In the trial of the first buyers' claim, the Supreme Court of British Columbia found the seller failed to act in good faith and use all reasonable efforts to remove her subject clause. The seller breached her agreement with the first buyers by using her subject to lawyer's approval clause to escape the contract to make a better deal with the second buyer. The court ordered the seller to carry out her contract with the first buyers.
Since the first buyers got the property, the second buyer may now claim damages against the seller for breach of that contract.
Zhang reminds a listing licensee in similar circumstances to always make any simultaneous contract with a second buyer subject to confirming in writing the collapse of the seller's deal with the first buyer.
1.Real Estate Council of British Columbia, Professional Standards Manual, online.
"Copyright British Columbia Real Estate Association. Reprinted with permission."