Did the Flood Frustrate Your Purchase Contract?
Breaking Down Frustration of Contracts in Real Estate
We’ve all seen the horrific images over the past weeks of those directly affected by record flood waters. What we haven’t seen reported in the mainstream media is those who have been directly impacted by virtue of having bought or sold a property, and settling on a possession date during or after the flood.
Many questions arise when realtors, lenders, lawyers, and others in real estate-related professions face the daunting prospect of resolving these untimely transactions. Let’s explore just one of those aspects which has inevitably arisen: sellers or buyers wanting to get out of their purchase contract as a result of the floodwaters affecting their property in question.
The law contains a legal doctrine known as “frustration of contract” which applies in certain limited circumstances to discharge parties from their obligations under a contract. The doctrine is an exception to the principle of caveat emptor, or ”˜buyer beware’, and generally arises in a real estate context in three types of situations: 1) Declarations of War, 2) Natural disasters, and 3) Coronation cases (this last type comes from the 1903 English case of Krell v Henry where a man entered a contract to rent a room for the sole purpose of watching the coronation procession of Edward VII but was disappointed when the king fell ill and the coronation was post-poned indefinitely. This individual sued for return of his deposit on the room on the grounds that the cancellation of the procession frustrated his sole purpose in entering into the contract in the first place).
In applying the doctrine of frustration, the question inevitably arises of how frustrated a purchase contract must be before a seller or buyer can get out of the contract. Does 2 inches of river water in a home give a purchaser reason to avoid taking possession of the house? Does the prospect of months of necessary remediation give a buyer grounds to terminate their contractual obligations (possibly with the underlying prospect of having the province pay for a brand new basement which the selling home-owner always longed for)?
There are three requirements which arise from the case law in order for a contract to be frustrated. First, the incident must be a supervening event (i.e., the condition cannot have existed at the time that the contract was entered into). Second, the event must have been beyond the control of the parties to the contract. Finally, the incident cannot have been contemplated by the parties.
This third requirement is likely the one which will give litigating lawyers on each side plenty of fodder for their respective arguments. Consider for a moment the luxury properties which line the banks of the Elbow River. Is it reasonably foreseeable that the Elbow could overflow its banks and impact these homes? Considering this is almost an annual event, it seems likely that this should have been contemplated by the parties. But what about neighborhoods not on an annual flood watch each spring? Consider, for example, homes minimally impacted by the “flood of the century” of 2005. Should it have been contemplated by the parties (to a purchase contract of a house in this area) that the home in question could be utterly destroyed by the Bow or Elbow massively overflowing its banks? It’s easy to take sides on this question, and unfortunately, leaves us with a difficult search for answers in these marginal situations.
Generally speaking, a real estate purchase contract may be terminated due to frustration when something occurs between the signing of the contract (or possibly after all conditions have been removed), and the possession date which renders it physically impossible to fulfill the contract or transforms one or both parties’ obligations into something radically different than that undertaken at the time the purchase contract was entered into. The courts will look at a number of factors including the construction of the contract and any clauses which speak to supervening events, the intentions of the parties (objectively considered), and the demands of justice. In considering each of these, no one factor is conclusive.
At the end of the day, the court has broad discretion to adjust the rights of the parties in a reasonable manner. This may involve setting the contract aside in certain situations, or it may be a far less imposing solution. At the end of the day, it falls to the parties to determine how much frustration is too much for the contract to be successfully completed.