Killing the Deal (Anticipatory Repudiation in a Real Estate Purchase)

April 22, 2024

Written By Simon Crawford and Jordan Oliva

Once an agreement of purchase and sale for real estate is signed, the path to closing and the rules of closing are firmly engrained, both in the terms of the contract and in principles of law and equity. You don’t get to unilaterally change the deal.

And when you insist on unilaterally changing the deal, by words or even just actions, you run the risk of repudiating the contract. When one party tries to do this in advance of closing, we refer to this as anticipatory repudiation.¹

Anticipatory repudiation occurs when a party indicates to the other party in advance an unwillingness to perform the contract before its performance is due.² To put it more bluntly, it is when, through words or actions, one parties effectively says to the other in advance of closing: “I am not going to close the transaction in accordance with the agreed upon deal.”

But of course, they do not have to be that plain or blunt in their communication. That message can be communicated in many ways, and sometimes, it may even be unintentionally communicated.

At a high level, the court will consider whether a reasonable person would believe that the indicating party no longer intends to be bound by the terms of the agreement.  More specifically, the court will assess whether there is³:

1. conduct that amounts to a total rejection of the obligations of the contract;
2. lack of justification for such conduct; and
3. acceptance of the repudiation by the innocent party within a reasonable time.

So, let’s break this down for a moment. The conduct must amount to a total rejection of the obligations of the contract. In concept, this sounds like a difficult standard to meet. But what it boils down to, is whether the offending party is purporting to deprive the other party of “substantially the whole” of the benefit of the contract.

The Court has emphasized that a finding of anticipatory repudiation is reserved for cases involving serious breaches, and before an anticipated contract breach can be deemed anticipatory repudiation, it must substantially deprive the innocent party of the contract's primary benefits.⁴

And how do you do that? From the caselaw, it would appear that one can do this by effectively communicating a refusal to honour those terms of the agreement that go to its core benefits by, for example, insisting on a change to one or more terms that are essential to the deal.

As the Supreme Court in Potter v. New Brunswick Legal Aid Services Commission (Potter) put it, an anticipatory breach “occurs when one party manifests, through words or conduct, an intention not to perform or not to be bound by a contract term that, if breached, would amount to repudiation of the entire contract.”⁵ No matter how it is manifested however, the courts have set out that “the refusal to perform must be clear and unequivocal to amount to a repudiation.”⁶

The second part of the test is that such conduct is not justified. When might it be justified? Well one might be justified in making such demands if they are in direct response to the default of the other party. So, for example, if the purchaser finds that the vendor misrepresented something material in the purchase agreement and then insists on an indemnity to address that misrepresentation, that could conceptually be reasonable justification for the demand, because the demand is in response to the counterparty’s default.⁷

The third part of the test, however, is key. In order for there to have been anticipatory repudiation, the innocent party has to have communicated acceptance of that repudiation within a reasonable period of time. Which is to say, that the innocent party has no obligation to accept anticipatory repudiation. It is fully within its rights to treat the contract as ongoing, insist on ongoing performance, and wait to see if the offending party actually fails to complete the transaction on closing. The Court in Potter put it this way⁸:

If the other party “accepts” the repudiation, the contract is over. If the other party does not accept the repudiation, the contract continues. In either case, the non-breaching party can pursue the available remedies which may vary depending on whether that party has accepted the repudiation or affirmed the contract.

So, let’s look at instances when the court has found that anticipatory repudiation has happened. These are examples only and each determination is fact specific. The determination of whether a specific breach constitutes repudiation will rely on the circumstances of each individual case and the terms of the agreement in question.

One example of repudiation by conduct arose in Lawrie v. Gentry Developments. In this case, the proper interpretation of the contract was that closing had to happen by midnight, but the vendor wrongly asserted that closing had to occur by 4:30 pm on the closing date and refused to close after 4:30. As the vendor’s assertion of the closing deadline was incorrect, its refusal to close after the deadline was determined to be a repudiation of the contract.⁹

In another example, 377447 Ontario Ltd. v. Saadat, after parties both failed to close on the closing date but verbally agreed to extend, the vendor's lawyer sent a letter to the purchaser's lawyer with a new purchase and sale agreement attached, asserting that the purchaser’s failure to close released the vendor from any obligation to complete the sale. That letter from the vendor's lawyer amounted to repudiation.¹⁰

A third example is Nicolaou v. Sobhani. Prior to closing the purchaser alleged that the vendor had misrepresented the lot size, declared the sale to be “null and void,” and demanded the return of the deposit. It turned out though, that the purchaser’s lawyer was wrong, but his letter (declaring the agreement null and void and demanding the deposit return) constituted an anticipatory breach of the contract by his client.¹¹

So, all of this brings us to the most recent Ontario case on this subject matter—Zoleta v. Singh and RE/MAX Twin City Realty¹². In 2022, the real estate market was volatile and house pricing was all over the place. Zoleta and Singh signed a purchase agreement for a property in Kitchener. Singh paid the deposit, and they were on their way towards closing.¹³

The problem Singh had was that he then went out to get financing, the appraisal report provided for a much lower value than the purchase price. Of course, he didn’t have a financing condition or any other condition to rely on to get out of the deal. So, he had his lawyer send a letter as follows¹⁴:

Please be advised that we act for the purchaser in the above transaction and we understand that you represent the vendors. So far so good.

We have been advised by our clients that the property has been appraised by $355,000.00 less than the purchase price, therefore, our clients require the abatement for the same.

We trust the foregoing to be satisfactory.

As it turns out, Zoleta did not find it to be satisfactory, and he replied that he would not agree to the abatement. In the period before closing, Zoleta let Singh know that he was going to relist the property on the MLS, and he actually did so six days before the anticipated closing date.¹⁵

As you would expect, the transaction did not close.

Here’s the upshot. Singh alleged that Zoleta repudiated the agreement by relisting the property on the MLS prior to closing. Zoleta in turn, alleged that Singh repudiated the contract by virtue of his lawyer sending the price abatement letter.

Zoleta sought summary judgement for damages totaling $345,121.98 for loss of sale value, carrying costs, and costs to extend the purchase of their new home. Singh sought dismissal of the summary judgment motion, return of his deposit, and damages due to the plaintiffs' anticipatory breach.¹⁶

So, the first question is whether the vendor’s actions in relisting the property prior to closing amounted to anticipatory repudiation. Not surprisingly, the court said the following¹⁷:

Whether the re-listing of a property for sale will constitute a repudiation or an abandonment of an existing agreement must, by necessity, turn on the underlying circumstances. The test for a repudiation, as stated in Spirent Communications, turns on whether a reasonable person would find that the breaching party, by their words or actions, has intimated that they no longer intend to bound by the contract in question.

The Plaintiffs submit, and I agree, that their words and actions, taken as a totality, unequivocally suggest that they remained committed to completing their sale of the property to Singh as scheduled, and had not repudiated the agreement.

So even though they had relisted the property, they and continued to communicate their unwavering commitment to close the transaction. They did not sign any other purchase agreements. They were just getting ready for the eventuality that Singh may not close. In addition, the Court clarified that even if the relisting had amounted to repudiation, Singh failed to promptly accept it.¹⁸

So, what about the purchase price abatement letter? You will recall that the lawyer’s letter said “my client requires an abatement.” The court found that “require” meant a demand, not a request or a proposal, and communicated an unwillingness to close without that requirement being satisfied. In shorthand, it was a unilateral demand for a change to the purchase price as a condition of closing—anticipatory repudiation.¹⁹

It makes you wonder if, in hindsight, Singh’s lawyer would have chosen a different word.

So, what do we learn from all of this? At the very least we learn that aggressive positioning that can be interpreted as being a hard line to change the deal, can backfire severely.

“I require this”, or “I require that”, as a precondition to closing can amount to a very dangerous position if what you are requiring is of such significance that it could be interpreted as going to the heart of the transaction.

Demanding a reduction in purchase price might seem obvious. But what about demanding or considering your client entitled to an extension of the closing date. What about demanding additional representations, warranties or indemnities on closing that are not contemplated by the closing date and impact the allocation of risk in the transaction? Once a purchase agreement is signed, by taking aggressive positions to negotiate additional or better terms for their client, lawyers may put the entire transaction at risk.

One must also be very careful of what I could call terminal threats to the other party. If you assert that the other side has done something wrong and then make a statement that can be interpreted as treating the transaction as terminated, then you had better be right. If you use words like “null and void”, or demand the return of the deposit, or purport to exercise remedies that are only consistent with the agreement having been terminated, those communications can put your own client in the position of having repudiated the contract notwithstanding what the other side has done.

So be careful. Be thoughtful with your words. Act and communicate in a manner consistent with the intention of closing the transaction in accordance with the terms of the deal.

Authors