Everybody hopes for a smooth closing. In many situations, the mechanics of closing may occur without issue, often just between lawyers and with little or no involvement from their clients. However, closing can also be very stressful, and issues and/or delays can arise for a myriad of reasons. Late mortgage instructions or a sudden discovery of (or change in) a defect in the property/title are perhaps the most common closing day issues. Legal counsel may engage in numerous telephone calls with each other to attempt to resolve these issues, but the parties may not always be involved or kept informed with what is occurring unless instructions are required. So – for the benefit of the typical purchaser or vendor – what happens on closing?
Escrow
Timing of closing is typically structured around the Land Registry Office’s notorious 5:00 p.m. cutoff time for registrations, due to the critical component of a land purchase being the delivery by the vendor of a “registrable deed” in favour of the purchaser. Historically, transactions were completed at the land registry office, where representatives of both purchaser and vendor would meet in person to exchange documents (including the deed), money and keys. As soon as all deliveries were made and the transaction was “closed”, the purchaser would register the deed as public notice of the transfer of title.
The modern closing generally does not require a physical meeting between the parties’ representatives and is virtually always completed by way of an escrow arrangement between the parties’ solicitors. “Escrow” is a term which describes the status of items or documents which have been delivered (whether physically or electronically) to the appropriate party, but remains in the control of the delivering party, such that the recipient is not able to use or rely upon the delivered items until the delivering party confirms it is “released” from escrow. Escrow agreements will dictate that the delivering party retain control (including the right to demand the return of) over their delivered items until escrow is released. If closing does not occur, all deliverables get returned to the originating party.
The concept of escrow allows parties to more easily make deliveries (whether on or in advance of closing) and permits all deliverables to be completed simultaneously such that the seller is not obliged to relinquish possession of and title to their property before they receive the buyer’s money, and vis versa. In Ontario, the escrow arrangement is generally established through the use of the widely accepted “Document Registration Agreement”.[1]
Tender
While an escrow arrangement may permit parties to comfortably deliver documents, money and keys at their leisure before the closing date and time, there will always be situations where one or both parties, for whatever reason, will struggle to make all deliveries before the closing time. Closing can become even more stressful if a dispute arises under the contract (such as the purchaser becoming aware of a material change in the condition property). If the dispute or threat of non-performance is not resolved before closing, the innocent party is not necessarily relieved of their obligation to complete the contract. Depending on the facts, an innocent party seeking to sue on the breach of the opposing party will typically have to demonstrate that they were able to complete their obligations under the contract, lest they be accused (and possibly counter-sued) of also failing to perform under the contract.
The most common method to demonstrate that a party is “ready, willing and able” to perform a contract is to “tender”, the occurrence of which will often form a critical component of an innocent party’s court claim, should the elect to sue. Put simply, tendering involves presenting all of the tendering party’s closing deliverables to the opposing party – this would include signed documents (including a “registrable” deed, which need only be completed as much as the tendering party is able without the cooperation of the other party), keys or codes required to enter buildings, money representing the balance due on closing, and any other deliverables specified by the governing purchase agreement.
There is no legislative guidance for how to complete tender. Some guidance can be found in the ample jurisprudence discussing the topic; Sidney Troister’s article, The Reality of Tendering: Why Real Estate Lawyers Give Fuel for Litigators to Sue Them (November 2011), provides a good summary of case law, but, as noted by Mr. Troister, caution should be exercised when relying on jurisprudence because the analysis of the validity of tender is typically on a case-by-case basis, and there is a tendency for courts to employ reasoning which leads to their desired result.
For the purposes of the parties who find themselves in the situation where the opposing party is unable to close, what is critical to know is that the innocent party should be prepared to demonstrate their ability to satisfy their closing obligations – including delivery of money, keys and signed documents, as applicable – at the time required by the contract, notwithstanding the other party, or the circumstances, may be indicating the other party may be unable to perform. Again, there may be circumstances in which a party need not tender, which should be discussed with your lawyer.
Delivery of Funds
An important, and sometimes the most difficult to manage, aspect of tender or closing is the delivery of money by the purchaser. Lawyers are bound by many rules – which carry the threat of significant penalties including a revocation of their license to practice law – regarding the handling of their client’s money. Escrow agreements can provide contractual control, and therefore some degree of comfort, when sending money to opposing counsel, but even so, lawyers are generally remiss to send their client’s money (which would include the purchaser’s bank’s money in the event of a mortgage financing) to a vendor’s solicitor until they know both parties are able to close.
The most common forms of delivery of funds include physical delivery (in person or by courier) of a certified cheque, direct deposit of certified funds into the recipient lawyer’s trust account, or electronic funds transfers (“EFTs”). Practically, physical delivery can be difficult where parties retain legal counsel physically who are not located in the city, or even jurisdiction, of the parties or the subject property. Anecdotally, I am aware of multiple law firms who have ceased accepting cheques or bank drafts entirely in an effort to streamline their banking process and limit the administrative difficulty of managing large volumes of daily deposits of physical cheques. I have also seen law firms cease to accept, or strongly oppose, direct deposits, citing undue difficulty in verifying the source of funds in accordance with law society rules and standards. Thus, there is an increasing reliance on EFTs, which (a) do not require physical attendance at a bank, (b) are by their nature verified funds, and (c) are typically (but not always) processed more quickly than the time it would take to courier or direct deposit a cheque.
Unfortunately, where a purchaser is required to tender, the purchaser’s solicitor must determine whether to deliver funds to the vendor’s solicitors which, depending on timing constraints, may not be possible prior to the scheduled closing time, and rely on the escrow agreement to compel the vendor’s solicitor to return funds if the transaction does not close. While there is case law suggesting that a purchaser’s lawyer merely needs to demonstrate they have sufficient funds to close in their trust account, this is not established law and, unless the purchase agreement stipulates otherwise, parties and lawyers should not assume delivering evidence of funds in trust will be sufficient to establish complete tender on the other party.
Closing Comments
In light of the various ways in which a transaction can go sideways on closing, here are some general tips for parties and lawyers alike to help mitigate the stress of closing:
- Lawyers – Ensure an escrow arrangement is in place. For every closing (and particularly where there is an exchange of money), ensure an escrow arrangement is in place, whether by executing a specific agreement or by agreeing to abide by a previously established set of terms. Do not rely on the courts to imply the existence of an escrow arrangement where no express agreement is in place.
- Deliver funds early. For clients, get funds required for closing to your solicitor before the closing day. A multi-million dollar transaction should not be put at risk on the assumption that banks and wires will operate quickly. Lawyers, for the same reason, if you have received the funds required to close, deliver funds to the vendor’s solicitor in escrow early unless there is clearly an anticipatory breach by the vendor for which your client is accepting the repudiation and terminating the contract. Not only will delaying delivery in anticipation of merely delivering evidence of funds in trust potentially weaken your argument of a successful tender, it may put your client in a default position should the parties miraculously resolve all other matters and there is no longer sufficient time to get funds to the vendor’s solicitor.
- Tailor your purchase agreement. Include tender language in your typical form of purchase agreement. In particular, to reduce the risk of tender being determined to be incomplete due to failure to physically deliver funds, include language in the purchase agreement which, in the context of tender, permits evidence of funds held in a solicitor’s trust account as sufficient to demonstrate your client’s ability to deliver same.
- Lawyers – know the law. Avoid wasting limited time drafting or conducting research on the afternoon of closing by being prepared for the worst-case scenario. Have a standard form of tendering letter readily accessible in your file and keep abreast of the law of tender.
- Communicate. Communication between lawyers and their clients is critical. Clients need to be in a position to make informed decisions, and as such lawyers must be clear and timely with their reports to their client. Continued and candid communication between lawyers is also important. Where client instruction permits, counsel should keep each other informed of any anticipated issues and proposed solutions. If it is possible that funds or other deliverables will be late, canvass the possibility of an extension early, such that the other party is not surprised by the request minutes before the closing time.
- Act reasonably. The law favours parties who behave reasonably and act in good faith. Strategic positioning to take advantage of the misfortunes of others may weaken an argument before a court when suing on technical or trivial defaults under a contract.
The real estate team at Soloway, Wright LLP has extensive experience guiding clients through commercial and residential real property transactions. Contact us regarding your potential purchase, sale, or financing, or if you have questions about your particular real property circumstances.
About the Author: Mike is an associate in Soloway Wright’s real estate team and is located in our office in Kingston, Ontario, with extensive experience providing legal advice to real property purchasers, vendors, lenders and developers across the province.
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] Prepared by the Joint LSUC-CBAO Committee on Electronic Registration of Title Documents in March 2004, as amended from time to time, as available on the Law Society of Ontario website.