Offer or Option #57

Aug 01, 1984

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By Gerry Neely
B.A. LL.B.

The following are all abbreviated examples of the usual "subject to" clauses to be fulfilled by a purchaser, right?

  1. "Subject to approval of purchase price and terms by (name of the president of the purchasing company was added here). . . "1
  2. "Subject to my inspection and approval of premises. . . "2
  3. "Subject to obtaining approval of rezoning by the Municipality of. . . "
  4. "Subject to obtaining a first mortgage from (Bank). . ."

Wrong! Or is it just maybe?

One judge of the Supreme Court of British Columbia has held that Clauses 1 and 2 differ from Clauses 3 and 4 in their legal results. The difference allowed the vendors named in the agreements containing Clauses 1 and 2 to revoke their acceptance of the purchasers' offers before the purchaser removed the subject to or the time to do so had expired.

Clauses 3 and 4 are examples of the subject to clauses which the judge described as being normal condition precedent clauses. They require the "approval of a third party, or that financing be obtained, or that some other thing exist or be done which does not then lie in the sole discretion of either party." These clauses impose an implied obligation on each party to do whatever is reasonably necessary on his part in order that the condition can be met. The failure by a party to use one's best efforts to meet the condition gives the other party at least a remedy in damages.

Clauses 1 and 2, however, are different because the conditions to be met depend upon decisions to be made solely by the purchasers.

The judge held that these clauses created an option in favour of the purchaser to be exercised within the specified period, rather than a binding contract that was subject to a condition precedent. For these to be true options, they must have been given either under seal or for consideration. In the first case, there was no seal and, since the reasons for judgment are silent in the second case, we must assume that there was no seal on the second agreement. In the absence of a seal, it was argued that the money paid by the purchaser by way of deposit represented the consideration for the option. That argument was rejected because the vendor could only retain the deposit monies if there were a binding agreement. In neither case could there be a binding agreement until the intended purchaser approved the agreement. There would have to be separate consideration which the vendor would retain even if the purchaser did not approve the deal, in order to support the validity of the option taken by the purchaser.

The reason why the judge felt he had to draw these distinctions between the two sets of clauses was because of a Court of Appeal decision.3 That decision concerned the enforcement of an agreement which was expressed to be subject to financing. The vendor repudiated before the purchaser had been able to obtain financing and before the expiration of the time provided by the agreement for that purpose. Two of the three Court of Appeal judges held that the agreement was a binding contract for sale subject to a condition precedent. In other words, the more normal subject clause found in Clauses 3 and 4. The third judge held that the agreement created a form of option and that the consideration supporting the option was the deposit made by the purchaser. While the comments of the third Court of Appeal judge were not binding upon the Supreme Court judge, it was his attempt to reconcile the third judge's comments that led to his concluding that where either the purchaser or the vendor may in his sole discretion decide whether or not to remove the condition, an option was created which must be under seal or supported by consideration.

The decisions in the first two cases may not be followed by other Courts who may prefer the reasoning of the third Court of Appeal judge if a similar case reaches the Court of Appeal. However, they do create an element of uncertainty in the practice that has been followed in writing subject to clauses in offers to purchase. A prudent licensee may wish to take an extra step to make sure that an offer remains open and binding upon the parties until the condition is met or not, as the case may be, or until the expiration of the time provided in the offer. Those steps might include any one of the following where it is possible that a subject to clause could be considered by the Court to be an option in favour of the purchaser:

  1. The majority of offers which would contain an option of this kind no doubt involve residential units which are off the market for short periods of time. Since the judge referred to a seal as one way of supporting the validity of a true option, then the simplest step to take is to purchase a quantity of the small gummed circular red legal seals and apply them to the offer at the time the purchaser makes his offer.
  2. The following clause proposed by Peter Watts to the Fraser Valley Real Estate Board:

"As consideration for the vendor granting this option to the purchaser until the subject removal date, the purchaser has paid the sum of $_____ to the vendor as a non-refundable deposit, which amount shall be retained by the vendor for their own use whether or not the purchaser removes the condition. In the event that the purchaser has not removed the condition in writing on or before the subject removal date, this agreement shall terminate and the said non-refundable deposit shall be retained by the vendor. If the condition is removed in writing by the purchaser on or before the subject removal date, the non-refundable deposit shall be applied on account of the purchase price on completion."

(Note that the amount of the deposit should depend upon the length of time the vendor's property will be off the market and therefore may be as small as $1.00. If the period of time is lengthier or if the value of the property is substantial, then the consideration should be substantially greater.)

  1. If a substantial deposit is placed immediately in an interest-earning account under the authority of a clause in the offer which allows the vendor to retain the interest earned, as consideration for the option in the event that the subject clause is not removed, the above clause could be adapted as follows:

"As consideration for the vendor granting this option to the purchaser until the subject removal date, the parties acknowledge that the deposit shall be placed at interest, with the interest to be paid to the vendor for his own use whether or not the purchaser removes the condition. If the purchaser has not removed the condition in writing on or before the subject removal date, this agreement shall terminate and the interest earned on the deposit shall be retained by the vendor. If the condition is removed in writing by the purchaser on or before the subject removal date, the interest earned on the deposit shall be applied on account of the purchase price on completion."

OR a further alternative,

  1. "The parties acknowledge that as consideration for the vendor granting this option to the purchaser until the subject removal date, the deposit of $1,000.00 includes the sum of $10.00 which is to be paid to the vendor as a non-refundable deposit whether or not the purchaser removes the condition. If the purchaser has not removed the condition in writing on or before the subject removal date, this agreement shall terminate and the non-refundable deposit of $10.00 shall be retained by the vendor. If the condition is removed in writing by the purchaser on or before the subject removal date, the nonrefundable deposit shall be applied on account of the purchase price on completion."

  1. Murray McDermid Holding Ltd. v. Thater, S.C.B.C., Prince George Registry, No. 697/79.
  2. Black Gavin & Co. Ltd. v. Cheung et al,(1980) 20 B.C.L.R. 21.
  3. Whitehall Estates Ltd. v. McCallum,(1976) 63 D.L.R. (3d) 320.

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