Satisfactory Financing #214

Jan 12, 1994

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

Subject to "satisfactory financing", while not a whim and fancy clause, has been analyzed in several earlier cases and again in a recent decision involving the cash purchase of a business. The purchaser's offer was subject to his arranging satisfactory financing.

He intended to do this through an institutional lender, whom he knew would base the decision to lend upon the appraised value of the property. The appraised value was found to be less than the price offered by the purchaser, and the lender refused to commit the amount the purchaser needed.

The vendors' offer to take back a mortgage from the purchaser was declined. A discussion took place concerning a reduction in price, but none was offered. This discussion, plus the purchaser's refusal to accept the vendors' offer of financing, led the vendors to argue that the purchaser's failure to complete was based upon his inability to negotiate a reduction in price, rather than the lack of financing to his satisfaction.

The sale did not proceed and the issue in this case was whether the purchaser was entitled to the return of the deposit. The judge decided that there was no evidence that the purchaser manipulated the appraisal, or made an offer to obtain the business at a lesser price.

He held that the purchaser acted reasonably in attempting to obtain satisfactory financing. In addition, the judge held that the offer of take-back financing amounted to a different transaction, and the purchaser was under no obligation to purchase on terms other than those contained in the offer.

In reaching his decision, that the purchaser was entitled to the return of the deposit, the judge referred to the case discussed in Column #121. In that case, the Court of Appeal said that satisfactory financing meant "satisfactory to a reasonable person with all the subjective, but reasonable standards of the particular person." 1

***

Several years ago, a lawyer questioned a purchaser's right to insist upon a holdback pending the receipt from Revenue Canada of a Clearance Certificate upon the sale of property owned by a non-resident, because the contract of purchase failed to authorize a holdback. This issue wasn't decided then, but was raised again in a case heard in Kelowna in September, 1993.

In the Kelowna case, the purchasers' solicitor asked for a holdback equal to 50% of the purchase price of a vacant lot. The vendor's solicitor, whose client resided in Hong Kong, wanted the percentage reduced to 33 1/3%. The vendor declined to sign the transfer documents, and when the purchasers sued for specific performance, one of the defenses they were met with was that an excessive holdback had been requested.2

According to the Reasons for judgment, where a Certificate of Compliance has not been obtained by a vendor, the purchaser is entitled to holdback 33 1/3 % of the purchase price where the vendor realized a capital gain, and 50% where a business profit was realized, (for example, if the vacant lot was inventory of the vendor.)

in answer to the vendor's objection that the purchasers produced no evidence to prove that the sale resulted in a business profit to the vendor, the judge said that it was not the purchasers' responsibility to examine the business affairs and history of the vendor, where such information and knowledge was peculiar to the vendor, to determine what rate of tax should apply.

Evidence was introduced that the practice in Vancouver in many transactions involving Hong Kong investors, is to holdback 50%. The judge accepted this evidence and ordered the vendor to specifically perform his contract by transferring title to the purchaser.

Revenue Canada Information Circular 72-17R4 contains an explanation of the properties subject to the different rates of tax, and a purchaser's liability for failure to ensure that the vendor complies with Section 1 16 of the Income Tax Act.

  1. Flack v. Sutherland, S.C.B.C., Victoria Registry, Reasons for judgment, September 24, 1993.
  2. Epp v. Yung, S.C.B.C., Kelowna Registry, Reasons for judgment, October 20, 1993.

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