The Double Default Rule in Real Estate Transactions

July 17, 2024

Written By Simon Crawford and Jacob Schroeter

"We're ready, willing and able to close. Are you?"

These are familiar words to those who buy and sell real estate. They embody the notion that, on the time appointed for the closing of the transaction, a party is ready to close and has their ducks in a row to do so.

And of course, these words are also often thought of in the context of another phrase: "time is of the essence" (which we will refer to as TOE)—the contractual concept that the dates and times in the purchase and sale agreement are to be adhered to strictly.

So combined, the two phrases connote, that on the set closing date and time, the parties are to show up with all of their required deliveries and moneys to complete the transaction, failing which, someone will be liable for damages.

But what happens if neither the seller nor the buyer is ready, willing and able to close at the appointed time for closing—a so-called "double default"?

In the recent British Columbia Court of Appeal (BCCA) case Lal v. Grewal,¹ the court provided us with a reminder of the longstanding principle known as the "Double Default Rule" or "The Rule in King v. Urban". Let's first revisit the seminal case on "double default", King v. Urban.²

"The Rule in King v. Urban"

In King v. Urban, the vendor (Urban) agreed to sell a property to the plaintiff (King), with a closing scheduled for July 2, 1968, and the agreement stipulated that time would be of the essence.

Neither Urban nor King showed up to closing with the deliveries required to close the transaction. The Ontario Court of Appeal (the COA) resolved this stalemate by applying two propositions:

1. first, when TOE applies and neither party is ready to close on the agreed date, the agreement remains in effect; and
2. second, either party may reinstate TOE by setting a new date for closing and providing reasonable notice to the other party.

The COA found that, as both parties were not ready to close on July 2, any argument based upon time being of the essence failed. Neither party had treated time as being of the essence. The way out of the stalemate would have been for either party to restore TOE with proper notice, which neither party had done.

The Rule Revisited in Lal v. Grewal

The agreement of purchase and sale in Lal v. Grewal included provisions that time would be of the essence and that the sale would be completed at the appropriate Land Titles Office.

On the stated closing date both parties failed to show up to closing at the appointed time with the required deliveries. The vendor failed to sign the transfer and to otherwise make themselves available for closing, and the purchaser did not provide their solicitor with the requisite funds to close.

Both the lower court and the BCCA were in agreement that the parties' actions constituted a "double default" scenario. The upshot again, applying the "Double Default Rule", was that the failure of each party to properly tender meant that the deal had not been terminated. The contract would continue in force beyond the stipulated closing date, until one of the parties sets a new closing date and is in a position to complete the contract on the agreed upon date.

Fortified in Fortress

Does the same rule apply in Ontario? Yes.

One notable Ontario decision to address the "Double Default Rule" is Fortress.³ This case turned on the delivery of an estoppel certificate. The parties entered into an agreement of purchase and sale for a commercial property, which provided that (1) closing would take place at 6:00 p.m. on August 13, 2018, and (2) the vendor would furnish the purchaser with tenant estoppel certificates at least five days before closing. Contrary to what was agreed, the vendor's solicitor delivered a signed copy of the only remaining certificate on the closing date itself with a material deficiency. The certificate was eventually revised to reflect the agreed-upon terms and delivered to the purchaser in the final hour before closing. The vendor denied the purchaser's request to extend closing and confirmed that it was ready, willing, and able to complete the transaction. The purchaser failed to transfer the funds until upwards of twenty minutes after the closing time. The vendor claimed that there had been a breach of contract and the agreement was dead.

Fortress is primarily a case which addresses the nexus between bad faith and the inability to close. The trial judge found that the vendor's conduct with respect to the delivery of the estoppel certificate was exactly that—a sign of bad faith. The COA adopted the trial court's reasons and held that for a party to insist on TOE (1) it has to have shown itself to be "ready, desirous, prompt and eager" to close (a variation of the magic words), and (2) it could not have been the cause of the delay or default in question.⁴ Neither of those preconditions was satisfied in the case at hand. Specific performance was therefore allowed in favor of the purchaser.

The courts' alternate reason for finding in favour of the purchaser is the critical point for our purposes. Both the trial court and the COA affirmed that "when both contracting parties breach a contract, the contract remains alive with time no longer being of the essence".⁵ Moreover, "either party may restore TOE by giving reasonable notice to the other party of a new date for performance".⁶ Therefore, when the purchaser attempted to close the transaction on August 14, a day after the closing date, it constituted a reasonable notice of a new date for performance. Although not explicitly mentioned, the principle in operation here is none other than the "Double Default Rule".

The Reminder

In short: the "Double Default Rule" still applies.

When time is of the essence in a transaction and both parties do not satisfy their obligations under the governing agreement, the failure of the parties to tender does not terminate the deal. The contract remains alive and TOE is paused.

In order to escape this purgatory, either of the defaulting parties may revive TOE by serving notice upon the other party fixing a new, reasonable date for closing. But, until then, the deal is postponed, and the parties are left with a sort of race to the cure.

Tendering will often be a contentious issue in "double default" scenarios. Though it is not always required, tendering serves as evidence of a party's clear readiness, willingness, and ability to close. In the same vein, tendering can also be utilized by a party claiming repudiation of a contract to demonstrate that they were not the cause of the default in question and that they had been acting in good faith. As per the reminder in Fortress, a party seeking to use the TOE clause to assert the termination of a contract by the counterparty will need to provide such evidence. The intentions of the parties with reference to their actual conduct prior to the closing date will be subject to scrutiny. And although it is not an explicit criterion of the rule at hand, Fortress reminds us of the importance of good faith commercial behaviour. As a best practice, parties are encouraged to avoid any actions that could in effect delay or prevent another party from being able to uphold their end of the bargain.

Most importantly however, be aware that just because both parties defaulted on closing, and nothing happened, the deal isn't dead. One doesn't get to then walk away. Either party can unilaterally put that transaction back on track to closing, and if on that new closing date only one party is ready, willing and able to close, then damages or perhaps even specific performance, may be awarded.

¹ Lal v. Grewal, 2024 BCCA 149, ("Lal v. Grewal").

² King v. Urban & Country Transport Ltd., [1973] OJ No 2181 (QL), 1 OR (2d) 449 ("King v. Urban").

³ Fortress Carlyle Peter St. Inc. v. Ricki's Construction and Painting Inc., 2019 ONCA 866 ("Fortress").

⁴ Fortress at paras 38 and 39.

⁵ Fortress Carlyle Peter St. Inc. v. Ricki's Construction and Painting Inc.,2019 ONSC 1507 at para 107; 2019 ONCA 866 at paras 18 and 39.

⁶ Ibid.

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