Mar 01, 1993

Limits Changes of First Offer #200


By Gerry Neely
B.A., LL.B.

A vendor, who accepted a conditional offer to purchase and then accepts a backup offer, limits his right to renegotiate the terms of the first contract. The first contract was with an individual purchaser from whom the vendor agreed to take back a mortgage for part of the sale price. The backup offer was subject to, "the collapse of that prior contract on or before midnight of May 14th, 1992."

The first purchaser assigned his interest in the contract to a numbered company whose principals asked the vendor to accept their personal covenants on the takeback mortgage, in substitution for the first purchaser's covenant. The vendor agreed, provided the purchase price was increased by $10,000, but withdrew this offer when a concern arose that any variations to the first contract would result in the backup offer becoming binding.

The backup purchaser thought that changes had occurred, filed a caveat and as a result, the vendor and the numbered company were unable to complete the sale to it. Three separate actions were commenced and four applications were made before the judge decided which purchaser was entitled to specific performance.

The backup purchaser claimed that the first contract was void for uncertainty because of the lack of some of the terms of the takeback mortgage. The judge's answer was that the backup purchaser, who was not a party to the first contract, had no right to challenge its validity. Further, if there was any uncertainty, then changes to the agreement to remove the uncertainty were evidence of the parties intention to uphold the first contract, and not of its collapse.

The backup purchaser also claimed that the first contract had either been extinguished and a new contract took its place, or in the context of the backup offer, the amendments resulted in its collapse. While this argument was lost because the judge held that the first contract was unchanged, the argument does highlight potential risk for both vendors and licensees.

A novation occurs when two parties to a contract agree with a third party that the third party shall replace one of them with the result that the party who is replaced has no further liability under the contract. This differs from an assignment because, while the first purchaser had the right to assign the benefits to a third party, he could not rid himself of his liability to the vendor to guarantee payment of the backup mortgage.

In this case if the vendor, for the consideration of $10,000, had transferred title to the numbered company and had accepted the covenants of the shareholders in substitution for the covenants of the first purchaser, a new contract would have been created to replace the first contract. The collapse of the first contract would then have made the backup offer enforceable and left the vendor liable for specific performance to one purchaser and in damages to the other purchaser.

Novation may not be limited just to a substitution of parties, but also to a substitution of the terms of the first contract. Does a new contract result if the parties increase or reduce the price, change the amount of the mortgage or the interest rate? It is not clear when a substitution of terms results in a new agreement.

Some help is provided in this case by the judge's comments that changes to remove uncertainty were not evidence of the collapse of the first offer. Additional assistance is found in the B.D. Management case referred to in columns 89 and 127. In that case the Court of Appeal held that an increase of $25,000 in the deposit for an extension of the completion date by approximately two months, were "non-fundamental details" of the first contract which did not lead to its collapse.

The question of whether a vendor who accepts a backup offer impliedly undertakes not to change to the prejudice of the backup purchaser, the terms of the first contract, was raised, but not answered because no alterations were made to it. The question does point to clauses the parties to the original transaction and to the backup offer may want to expressly add to the offers. A first purchaser who knew that there were others who were keenly interested in purchasing the property might want a clause which would prevent the vendor from signing a backup offer, which might be effective to avoid entangling the purchaser in the kind of litigation that occurred in this case. The backup purchaser might want the vendor to covenant not to alter any of the terms of the first contract, and conversely the vendor might want to reserve the right to alter any of its terms.1

 1. 411076 B.C. Ltd. v. McCulagh, 72 B.C.L.R. 2nd, p. 252.

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