Purchasing land can be a major decision for a business and, in making that decision, equal consideration should be given to tax planning and intended ownership structure. If a purchaser is not prepared to make such decisions upon signing the purchase agreement, the principal or party related to the purchasing business may opt to sign a purchase agreement “in trust for a company to be incorporated”.
This approach is permitted under Section 21 of the Ontario Business Corporations Act,[1] which provides that a newly incorporated corporation can be bound by contracts signed in its name prior to incorporation if the corporation adopts the agreement in writing. In such cases, the party signing on behalf of the non-existent purchaser is referred to as the “promoter”. The promoter is automatically deemed to have liability under that contract[2] unless the agreement contains express intention that the promoter is not to be bound by the terms of the contract.[3]
What, then, does the Vendor hold by way of a “contract” in the face of a promotor who signed without personal liability? The purchaser does not exist, and the promoter is immune to liability. If there is a breach under the agreement by the promoter, the Vendor is unable to seek recourse against either the promoter or the to-be-incorporated purchaser, yet the Vendor remains exposed to liability in the event of its own breach. If the deal falls apart, what occurs to a deposit paid by the promoter on behalf of the non-existent purchaser?
This was at the centre of the 2018 decision in Benedetto v 2453912 Ontario Inc.[4], wherein a promoter signed an agreement to purchase property “in trust for a company to be incorporated without any personal liabilities”. A deposit was paid by the promoter upon signing. Subsequently, but prior to the adoption of the contract by the intended corporate purchaser, the promoter advised the purchaser would not be completing the contract and sued for the return of the deposit.
When interpreting contracts, one must presume that any given term was included for a reason. Under common law, deposits are made as security for performance under the contract, forfeiture of which provides compensation to the Vendor for the lost opportunity of keeping the property on the market. As relieving the promoter from forfeiture of the deposit would render its payment meaningless, the court refused to interpret Section 21(4) of the Act as relieving a promoter from the usual laws governing deposits. In grappling with the dichotomy between the wording of Section 21 of the Act and the common law principals applicable to deposits, the court held (and the appellate court agreed) that the terms applicable to the deposit were separate and distinct from the terms of the purchase agreement. Accordingly, it was held that, while the language of Section 21(4) applied to the purchase agreement, it did not apply to the “distinct”, implied terms which governed the deposit.
The decisions from Benedetto have been the subject of legal commentary (and criticism), but the subject matter has not yet faced further judicial scrutiny. While the interplay between the legal concepts involved may be complicated and contested, the practical advice which can be given to transacting parties following the Benedetto decision is less convoluted: where possible, avoid signing purchase agreements “in trust” particularly where a deposit is involved. More specifically:
- Purchasers (and Promoters) – Notwithstanding a quick reading of Section 21 of the Act, a deposit paid by a promoter is not free of risk if the deal is aborted by the promoter, even if the promoter signs “without personal liability”. If a promoter/purchaser wants to enjoy a risk-free period while holding the property under contract, negotiate a discretionary condition clause and limited assignability clause to provide the necessary time and flexibility to determine the desired ownership and incorporate the intended “purchaser”.
- Vendors – Resist requests from prospective purchasers to sign a purchase agreement “in trust and without personal liability” and insist there be a party assuming liability in the event of default on the part of the purchaser under the contract.
- Drafters – Be aware of the trend in jurisprudence to take a ‘two agreement’ approach when dealing with deposits and, when drafting the deposit clause, clearly identify the intentions of the parties regarding return or forfeit of a deposit.
About the Author: Mike McDonald joined Soloway Wright’s Real Estate & Development Group in Kingston in 2021 after practicing at a full-service firm in Toronto. He specializes in commercial real estate transactions, with a focus on condominium development. With a background in mechanical engineering and a practical, solution-oriented legal approach, he represents developers, municipalities, lenders, and property owners.
The Real Estate and Development Team at Soloway Wright LLP has a wide range of expertise on all matters affecting land transactions and title. Contact one of our members to explore how we can assist with your legal needs.
DISCLAIMER: This article is for general information purposes only and is not (and should not be construed as) legal advice. The information contained herein summarizes only certain aspects of the subject matter and is not a comprehensive review of applicable law. All of the foregoing is subject to legal and accounting advice based on the particular circumstances of each potential client.
[1] R.S.O. 1990, c. B.16, s. 21 (the “Act”)
[2] Ibid, s. 21(1).
[3] Ibid, s. 21(4).
[4] 2018 ONSC 4524, aff’d 2019 ONCA 149 [Benedetto].
