Must a Buyer accept an Open Building Permit on Closing?

December 20, 2024

Written By Simon Crawford and Dana Talucci

In recent years, courts in Ontario have struggled with the answer to this question, and we direct you to our earlier blog, Requisitioning the Closure of Open Building Permits, on the subject that considered the 2022 case Chan v Mangal¹ that also looked at the issue.

More recently, however, the Court again considered whether the closure/removal of an open building permit can be requisitioned as a matter of title in Ontario…and it came to an answer that is unsettling to some.

As a practical matter, a buyer of real estate does not want there to be an open building permit when it purchases a property. An open building permit suggests a risk that some work at the property may be unfinished…which of course is problematic for a purchaser. So as a business matter, the buyer of the property will want the open building permit closed.

But the risk that the buyer is concerned about relates to the building and the potential that there is unfinished physical work to do. The risk has nothing to do with whether the seller actually owns the building or has some flaw, deficiency or cloud on the nature or validity of its ownership or title to the property. The risk is not a title risk... it is a building deficiency risk. The open building permit is not registered on title. It is not an encumbrance on title. It is irrelevant to title.

But the court saw things differently in EPRF Holdings Ltd. v Fergus Bloor Inc.². Here’s how things unfolded.

On October 18, 2019, EPRF Holdings Limited (the Vendor), as vendor, and Fergus Bloor Inc. (Fergus), as purchaser, entered into an agreement of purchase and sale for a commercial building (the APS).

On March 17, Fergus, in compliance with the required timeline for requisitions, requisitioned the closure of the two outstanding building permits.

On March 18, the Vendor’s counsel advised Fergus’ counsel that both permits had been cleared and that the Vendor could obtain confirmation from its contact at the City of Toronto. Curiously, it would appear that, at this point, the Vendor didn’t deny the validity of the requisition... but simply answered that the permits had been closed.

Much then happened between the parties that perhaps the court took into consideration, but which have no bearing on the legal issue. Extensions were requested and denied. Solutions for vendor financing were offered and rejected.

Then, on March 31, one day before the scheduled closing date, Fergus’ counsel advised the Vendor’s counsel that there was still one building permit outstanding and that the title insurer would not provide coverage for same. The Vendor asserted that the remaining open building permit was not related to the subject property. As it turns out, it appeared that the remaining permit was for a bank machine across the street... and that the permit was mis-referencing the property.

On April 1, the closing date, the Vendor tendered on, among others, Fergus and its assignee (collectively, the Purchaser). On April 6, the remaining outstanding permit was deleted.

The Vendor sued the Purchaser for payment of the deposit, damages for breach of the APS and punitive damages. The Purchaser counterclaimed for return of the deposit.

Paragraph 8 of the APS stated the following:

"(ii) five days prior to completion, to satisfy himself that there are no outstanding work orders or deficiency notices affecting the Property, and that its present use (................................................................) may be lawfully continued. If within that time any valid objection to title or to any outstanding work order or deficiency notice, or to the fact that the said present use may not lawfully be continued, is made in writing to the Seller and which the Seller is unable or unwilling to remove, remedy or satisfy or obtain insurance in favour of the Buyer and any mortgagee, (with all related costs at the expense of the Seller), and which the Buyer will not waive, this Agreement notwithstanding any intermediate acts or negotiations in respect of such objections, shall be at an end and all monies paid shall be returned without interest or deduction and the Seller, Listing Brokerage and Co-operating Brokerage shall not be liable for any costs or damages."

Relying on paragraph 8 of the APS, the Purchaser submitted that the outstanding work permit constituted a "valid objection to title", an "outstanding work order" and/or a "deficiency notice", that the Vendor was obligated to remove it or provide title insurance coverage over it, and that as neither occurred, it was entitled to treat the agreement as at an end.

The motion judge agreed with the Purchaser that the Vendor was obligated to have the permit removed or otherwise provide title insurance, which was not available in this instance, and that the Purchaser did not have to accept the Vendor’s declaration and undertaking in lieu of same. The Purchaser was not obligated to assume the risks related to the open permit.

The motion judge found that the work permit was a legitimate concern to the Purchaser and emphasized that (1) the Vendor stated that the permit was removed when it was in fact not, (2) the permits had been open since 2011, (3) the Vendor claimed that according to the City of Toronto, both permits would be removed in February and the permit in dispute was not removed, which indicated that there may be a problem with its removal, (4) the Vendor was not able to easily remove the permit which undermined the Vendor’s position that it would be an easy matter to deal with, (5) if the permit wasn’t removed the Purchaser would have to bring an application before court, and (6) the Purchaser did not want to be involved in litigation related to this.

The Vendor appealed.

At the Court of Appeal³, the Vendor cited Thomas v Carreno⁴ and 1854822 Ontario Ltd. v Estate of Manual Martins⁵, which states that where courts found that an open permit could expose a property owner to a work order, expensive remedial work and potential litigation, and where the purchaser’s right to enjoyment of the property is by no means certain, the open building permit is not a "minor defect" but rather goes to the root of title.  The Vendor argued that in those cases, the building permits were for possible remedial work, whereas in this instance, the building permit did not relate to any deficiency on the property.

The Court of Appeal dismissed the appeal and found that the motion judge made a mixed finding of fact and law regarding the parties’ rights and obligations under the agreement of purchase and sale. Accordingly, they had to defer to the motion judge’s decision absent an error of principle or palpable and overriding error of fact.

The Court of Appeal found that (1) it was open to the motion judge to find that the Vendor could not deliver peaceful possession of the property, and (2) the motion judge was entitled to infer that litigation was a real possibility, especially given the Vendor’s failure to obtain the removal of the open permit weeks after it had raised the issue with the City of Toronto.

Many practitioners may take issue with these conclusions.

On the first point, quiet and peaceful possession of real estate has nothing to do with open building permits. On the second, the potential for future litigation is not the basis for a valid requisition if not rooted in either a title matter or one of the specified off-title matters that one is allowed, by the terms of the purchase agreement to requisition.

The existence of building permits does not constitute evidence that any such work has begun or is ongoing. Their existence does not require that any work be done or commenced. Their existence does not constitute evidence that the property is in violation of the law. Building permits are neither an encumbrance on title, nor do they constitute a matter of title. In addition, they do not constitute work orders or evidence that there is any deficiency with the property. The open building permit has nothing to do with quiet possession. It has nothing to do with litigation.

Moreover, to add insult to injury, in this case, the building permit wasn’t even for the property. There was factual evidence that it was for the installation of a bank machine on a neighboring property.

So, what do we do about this case law? Presumably, fix the standard form purchase agreements. The answer (at a minimum) may be to contractually treat building permits exactly as we do work orders:

1. add "open building permits" to the list of things that can be requisitioned during the requisition period; and
2. provide that they cannot be requisitioned following the requisition period unless they arise after the end of the requisition period.

If the parties want a more fulsome provision to deal with the problematic case law, they might add mutual agreement that open building permits constitute neither matters of title nor matters that can otherwise be requisitioned, including as matters of conveyance... effectively purporting to “contract out” of the problematic case law.

Of course, there will be variations on the theme. A seller may want the freedom to provide an undertaking (with or without holdback) on closing to deal with open building permits following closing. A seller may want to exclude from its responsibility, those open building permits applied for by current tenants who are doing proper work in their own premises as permitted by their leases.

To sum things up, notwithstanding this controversial string of caselaw on open building permits, there remains good argument that:

1. the existence of an open building permit is not a matter that relates to the owner’s title to the property (and certainly does not go to the “root of title”); and
   
2. an open building permit is not a work order, a deficiency notice or any similar confirmation that the property is not in compliance with law.
   

But for now, there is case law that would suggest otherwise than 1 and 2, and so practitioners need to specifically deal with the issue of open building permits in their agreements of purchase and sale, so as not to allow the recent common law to fill the void. Relying only on the standard OREA/TREB language, as it relates to requisitions, could lead to unintended results and rights.

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