Navigating Pre-Construction APS Termination: The ‘Reasonable Time’ Rule in Ontario Real Estate

In the dynamic world of real estate development, pre-construction Agreements of Purchase and Sale (APS) are foundational contracts between developers and prospective buyers. These agreements outline the terms and conditions for purchasing a property that has yet to be built or is under construction. However, what happens when a buyer allegedly breaches such an agreement? More specifically, at what point in time should a developer terminate a pre-construction APS when confronted with a buyer’s breach?

This crucial question was addressed by the Ontario Superior Court of Justice in the significant case of Lucas v. 1858793 Ontario Inc. o/a Howard Park. The court’s unequivocal answer: termination must occur “within a reasonable time.” But what exactly constitutes a “reasonable time” in the eyes of the law, and what are the far-reaching implications for both developers and homebuyers in Ontario?

The Case at Hand: Lucas v. 1858793 Ontario Inc. o/a Howard Park

To fully grasp the court’s reasoning and the principles it established, let’s delve into the specifics of the Lucas case. In 2015, Alexandre and Kelly Lucas entered into a pre-construction APS with 1858793 Ontario Inc., operating as Howard Park (hereafter referred to as “185”), for the purchase of Unit 421, a new condominium located at 38 Howard Park Ave. in Toronto. Over the subsequent years, leading up to 2018, the Lucases diligently fulfilled all their contractual obligations, including making all required deposits. Furthermore, they began paying monthly occupancy fees starting in April 2018, a standard practice in pre-construction condominium purchases where buyers occupy the unit before final title transfer.

The situation took a dramatic turn as the scheduled closing date approached in February 2019. At this late stage, 185 unilaterally terminated the APS. The developer’s justification for this abrupt termination was an alleged breach by the Lucases: they claimed the Lucases had leased their unit to a friend, Duarte, from May to September 2018, without obtaining 185’s prior written consent, a condition explicitly stipulated in the APS.

The Alleged Breach and the APS Clause

Indeed, the APS contained a specific clause prohibiting the Lucases from leasing their unit without the express prior consent of 185. Crucially, this clause also stated that if the Lucases breached this term, such a breach would be “incapable of rectification.” Furthermore, the agreement reserved the sole “right and option of terminating the APS” exclusively to 185. In essence, 185 asserted that it held the unilateral power to treat the agreement as terminated due to this alleged breach. Following the termination, 185 took the position that it was entitled to retain all the deposits made by the Lucases. The developer then swiftly attempted to resell the unit to a related party. However, the Lucases, disputing the termination, placed an encumbrance on the title, effectively preventing the developer’s sale from closing. Consequently, the Lucases initiated legal action against 185, seeking two primary forms of relief: protection from forfeiture of their significant deposits and specific performance, which would compel 185 to complete the sale of the unit back to them.

Did the Lucases Actually Breach the APS?

The court first addressed the fundamental question of whether the Lucases had, in fact, breached the APS by allowing Duarte to stay in their unit. The developer’s argument hinged on the interpretation of “lease.” The court, however, meticulously examined this claim. It noted that while the Condominium Act itself does not provide a specific definition for the term “lease,” its common and accepted legal definition typically refers to a written contract, for a fixed period, which grants permission for the use of an asset, usually in exchange for rent or other consideration.

In this particular instance, the court found no evidence to support the existence of such a lease agreement between the Lucases and Duarte. There was no written contract, nor was there any indication or evidence whatsoever that the Lucases charged Duarte any rent or received any financial benefit from his occupancy. The relationship appeared to be one of friendship and hospitality. Consequently, the court concluded that the terms of the APS, as drafted, did not prohibit the Lucases from allowing their friends and family members to stay in their unit for periods, especially without any commercial intent. Therefore, the court ruled that the Lucases had not breached the APS.

Even If a Breach Occurred, Did 185 Retain the Right to Terminate? The Principle of “Election”

Even after determining that no breach occurred, the court proceeded to consider a hypothetical scenario: what if the Lucases had, for argument’s sake, breached the APS? Would 185 still have been entitled to terminate the agreement? The court’s answer was a resounding no. This aspect of the judgment is particularly critical as it highlights a fundamental principle of contract law known as the “election doctrine.”

As a general rule, when an innocent party discovers a contractual breach by the other party, they are presented with a crucial choice, or “election.” The innocent party must choose either:

To treat the contract as remaining in full force and effect, thereby affirming the agreement despite the breach; or
To treat the contract as being terminated due to the breach, bringing the contractual relationship to an end.

Crucially, if the innocent party chooses to terminate the contract, they must communicate this election to the breaching party clearly and unequivocally, and most importantly, within a reasonable time after becoming aware of the breach. Failure to make and communicate this election promptly can lead to the innocent party losing their right to terminate the contract, as their inaction may be interpreted as an affirmation of the agreement.

185’s Failure to Elect Within a Reasonable Time

The court meticulously examined 185’s conduct following its discovery of Duarte’s occupancy and found that 185 had failed to communicate its election to terminate within a reasonable time. The evidence presented a clear pattern of delay and inconsistent behavior on the part of the developer:

Early Knowledge: 185 was aware of Duarte’s occupancy from its very outset in May 2018. The Lucases themselves openly communicated this, even emailing 185 on May 3, 2018, to inquire which parking space their “tenant” (referring to Duarte) could use. This demonstrated 185’s immediate awareness of the situation.
Prolonged Inaction: Despite this early knowledge, 185 took no discernible steps to address Duarte’s presence throughout the entire summer of 2018. This prolonged silence and lack of action weighed heavily against their later claim of breach.
Ambiguous Communication: It was not until September 21, 2018, that 185 finally emailed the Lucases, informing them that they were in breach of the APS and denying Duarte access to the unit. However, critically, this email did not actually treat the APS as terminated. Instead, it ambiguously advised the Lucases that they could “cure” the alleged breach by signing off on deficiencies, implying the contract was still alive and rectifiable. This directly contradicted the APS clause stating the breach was “incapable of rectification” and demonstrated 185’s hesitation to truly terminate.
Continued Affirmation of Contract: Following this email, Duarte moved out. The unit subsequently remained unoccupied, yet 185 continued to collect the Lucases’ monthly occupancy fees without interruption. The acceptance of these payments served as further evidence that 185 was treating the APS as a continuing, valid contract.
Using Breach as Leverage: Later, in December 2018 and January 2019, 185 attempted to leverage the alleged breach as an excuse to avoid repairing the Lucases’ bathtub, which was suffering from deficiencies. During these interactions, once again, 185 still did not explicitly inform the Lucases that the APS had been terminated. This suggested the alleged breach was being used as a bargaining chip rather than a definitive reason for termination.
Last-Minute Termination: The ultimate termination communication only came weeks before the final closing, in February 2019. By this point, nearly nine months had passed since 185 first became aware of the alleged breach.

Based on this timeline, the court concluded that by not treating the APS as terminated – and specifically, as “incapable of rectification” – when it first knew of the breach (at the latest by September 2018), 185 effectively lost, or “waived,” its right to terminate the agreement. Their prolonged inaction and inconsistent communications affirmed the contract, extinguishing their option to end it based on the earlier alleged breach.

Appropriate Remedies and the Court’s Equitable Stance

Given its findings, the court proceeded to determine the appropriate remedies for the Lucases. Since 185 had waived its right of termination, it followed logically that 185 had no legal right to retain the Lucases’ substantial deposits. The court ordered that these deposits be returned to the buyers.

More significantly, the court ordered specific performance, a powerful equitable remedy that compels a party to fulfill their precise contractual obligations. In this case, specific performance meant that the unit was to be returned to the Lucases, and 185 was ordered to complete the sale as per the original APS.

Rationale for Specific Performance

The court’s decision to grant specific performance was rooted in several key considerations:

Significant Increase in Value: Over the four years since the APS was signed, the condominium unit had appreciated significantly in value. The court recognized that simply returning the deposits would not adequately compensate the Lucases, as they would be unable to find a reasonably comparable substitute property in the rapidly escalating Toronto market within the original price range. This speaks to the uniqueness of real estate.
Deterrence Against Opportunistic Termination: The court also expressed concern that failing to order specific performance in such circumstances could create a perverse incentive for developers. In a rising market, developers might be tempted to opportunistically terminate agreements based on minor or questionable breaches, hoping to resell the unit at a much higher price. The court’s order sent a clear message against such practices, aiming to uphold contractual integrity and protect buyers.
Reversal of Sham Sale: The court unequivocally declared 185’s purported sale of the unit to a related party as a “sham.” This transaction was perceived as a deliberate attempt by the developer to circumvent the Lucases’ rights and prevent them from acquiring title. The court’s ruling effectively reversed this artificial sale, ensuring that the original buyers could proceed with their purchase.

In my professional opinion, the court’s judgment in this situation demonstrated a strong commitment to fairness and equity towards the Lucases. While it is true that the Lucases may not have perfectly adhered to every nuance of the APS (e.g., the parking email about a “tenant”), 185’s subsequent actions made it abundantly clear that the developer did not possess a genuine and timely intention to terminate the APS. Instead, 185 appeared to use the alleged breach merely as a bargaining chip or leverage tactic, primarily to relieve itself of its own obligations, such as repairing identified deficiencies, or to capitalize on a surging real estate market.

Key Takeaways for Developers and Buyers

The Lucas v. Howard Park case serves as a critical precedent in Ontario real estate law, offering vital lessons for all parties involved in pre-construction agreements.

For Developers:

Act Promptly and Decisively: If a buyer breaches an APS and you intend to terminate, you must act and communicate this decision within a reasonable time. Procrastination or inconsistent actions can lead to the forfeiture of your termination rights.
Clear Communication is Paramount: Any communication regarding a breach and your election (whether to affirm or terminate) must be unambiguous and unequivocal. Do not send mixed signals or use the alleged breach as leverage for other matters.
Understand the “Election” Principle: Be aware that accepting payments (like occupancy fees) or engaging in discussions about curing a breach after becoming aware of it can be interpreted as affirming the contract, thereby waiving your right to terminate based on that breach.
Beware of Opportunistic Terminations: The courts are vigilant against developers attempting to terminate agreements solely to take advantage of rising market values. Such actions can lead to severe consequences, including specific performance.
Seek Legal Counsel: Always consult with legal counsel immediately upon discovering a potential breach to ensure proper procedure and protect your contractual rights.

For Buyers:

Understand Your APS: Thoroughly review and understand all clauses in your pre-construction agreement, especially those pertaining to breaches, assignments, and occupancy.
Communicate Openly: If you are allowing someone to stay in your unit (even temporarily), understand the terms of your agreement regarding guests, tenants, or sub-leasing. Err on the side of caution and seek developer consent if required.
Document Everything: Maintain meticulous records of all communications with the developer, including emails, letters, and records of payments. This documentation can be crucial evidence if disputes arise.
Know Your Rights: If a developer attempts to terminate your APS, especially after a prolonged period or with inconsistent justification, know that you may have legal recourse. Do not hesitate to seek independent legal advice.
The Power of Specific Performance: Be aware that in certain circumstances, particularly for unique properties like real estate in appreciating markets, courts may order specific performance, forcing the developer to complete the sale.

Defining “Reasonable Time”: A Contextual Analysis

The elusive concept of “reasonable time” is not a fixed metric; rather, it is a contextual determination that hinges on the specific facts and circumstances of each individual case. While the *Lucas* case clearly demonstrated what constitutes an unreasonable delay, it’s important to understand the factors that courts typically consider when assessing this timeframe:

Nature and Gravity of the Breach: A minor, easily rectifiable breach might afford a slightly longer “reasonable time” than a fundamental, irreparable breach that goes to the root of the contract.
Knowledge of the Breach: The clock starts ticking from when the innocent party *knew or ought to have known* about the breach.
Prejudice to the Other Party: If the delay in election causes prejudice or detriment to the breaching party (e.g., they lose opportunities, incur costs assuming the contract is still alive), the “reasonable time” period will likely be shorter.
Complexity of the Situation: A highly complex breach requiring extensive investigation or legal analysis might warrant a slightly longer period for the innocent party to make their election.
Market Conditions: As highlighted in *Lucas*, fluctuating market conditions, especially a rapidly rising market, can put greater pressure on the innocent party to make a swift election to prevent opportunistic behavior.
Industry Practice: What is considered standard or reasonable within a particular industry or type of contract can also influence the court’s determination.

In sum, the *Lucas v. 1858793 Ontario Inc. o/a Howard Park* decision firmly establishes that an innocent party in a pre-construction APS has a clear obligation to communicate its election regarding a breach within a reasonable time. What constitutes “reasonable time” will always depend on the unique circumstances of each case, but the overarching principle remains: to safeguard one’s rights, an innocent party should communicate their intended course of action (whether to continue with the agreement, perhaps in a modified form, or to terminate it) as promptly and explicitly as possible. Failure to do so carries significant risks, potentially preventing the innocent party from relying on the breach to bring the agreement to an end, and as demonstrated, could lead to costly legal battles and adverse court orders.

Eugenia Bashura joined Boghosian + Allen LLP in 2019 to complete her articles. She is a graduate of the University of Windsor.