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Exculpatory clauses in pre-construction agreements of purchase and sale

If you take a drive around Ottawa, you’ll see one development project going up after another. Whether it’s a subdivision in Kanata, or a condominium building in Centertown, newly built homes are increasingly appealing. But those buying new builds should be aware of the distinct features contained in an agreement of purchase and sale for new homes. 

The new-home construction industry is primarily regulated by the Ontario New Homes Warranty Plan Act, 19901 and its regulations. Although there are standard Ontario Real Estate Association resale agreements, there is no standard form of agreement for new homes, and new home builders and vendors will often use their own form of an agreement of purchase and sale. However, new home agreements are required to include schedules provided for by Tarion. 

Due to the complexities of new home agreements, as well as provisions that may create risks that are adverse to the buyer’s best interests, it is prudent for buyers to seek legal advice before signing an agreement when purchasing a new home. The potential risks inherent to new home agreements became evident in a recent Ontario Court of Appeal decision, Ritchie v Castlepoint Greybrook Sterling Inc.2

The issue in Ritchie was centred around the enforceability of an early termination clause that limited the buyers’ rights in the event that the vendor terminated the agreement of purchase. The buyers in Ritchie entered into pre-construction agreements of purchase and sale, with a land developer, Castlepoint, for a unit in a 10-storey residential condominium building. Ultimately, Castlepoint never began the construction of the condominium and, in late 2016 – relying on the early termination provision in the agreements – Castlepoint terminated the agreements, returning the buyers’ deposits with interest.

The early termination clause was an exculpatory clause, which is a contract provision that relieves one party of liability if damages are caused during the execution of the contract. The buyers in Ritchie argued that they had lost the opportunity to obtain a residential condominium unit at the bargained-for price in a dramatically rising market.3 Although the buyers were able to recover the deposits that were paid upon entering into the Agreements, they sued Castlepoint for damages resulting from a breach of contract.

However, the exculpatory clause in the Ritchie Agreements provided that the vendor would “not be liable for any damages or costs whatsoever incurred resulting from the termination of the Agreement including, without limiting the generality of the foregoing, relocation costs, professional fees and disbursements, opportunity costs, loss of bargain or any other damages or costs incurred by the Purchaser, directly or indirectly.”4

Castlepoint presented evidence that its exculpatory clause was typical of other exclusion clauses found in the pre-development condominium agreements of purchase and sale of other developers of residential condominium projects. Moreover, the Tarion addendums required by section 8 of O Reg 165/085 (warranty for delayed closing or delayed occupancy) provide conditions that allow vendors and buyers to include conditions in agreements of purchase and sale that give rise to early termination of the agreement if they aren’t satisfied.6

The Ontario Superior Court of Justice decided that the exculpatory clause’s language was not ambiguous and was in fact enforceable. The court thus allowed Castlepoint’s motion for summary judgment, effectively deciding that the buyers were not entitled to damages. 

On appeal, the court agreed with the Superior Court’s interpretation of the exculpatory clause. On a plain reading of the clause, the buyers were limited to the recovery of their deposit plus interest upon termination of the Agreements by Castlepoint. The appeal court also agreed with the Superior Court in concluding that the Tarion provisions that were incorporated into the agreements, and that did not impose certain good faith obligations on the vendor, did not alter the plain meaning of the exculpatory clause.

Ultimately, exculpatory clauses, also known as limitation of liability clauses, or exemption clauses, are concerned with the allocation of risk as between the parties to the agreement in the event the agreement is terminated. An exculpatory clause allocates this risk between the parties by limiting the vendor’s liability, and therefore the buyer’s right to damages, where the agreement of purchase and sale is terminated when the buyer is not at fault.7

Pre-construction agreements of purchase and sale may present many risks to buyers of new homes with respect to delays and possible non-completion of the development. Buyers must be aware of the early termination clauses that aim to limit the vendor’s liability to the buyers. As in the Ontario Court of Appeal Ritchie decision, where these clauses were clearly written and unambiguous, the buyer will likely not be able to recover damages suffered from the early termination of the agreement of purchase and sale. 

Philippe Guiton is a litigation lawyer at Perley-Robertson, Hill & McDougall. He represents clients in litigation matters involving personal injuries, insurance claims, tax fraud and bankruptcy. Guiton’s expertise encompasses all aspects of litigation files including trials, motions, mediations and settlement conferences.

1 RSO 1990, c O-31.
2 2021 ONCA 214. See also Ritchie v Castlepoint Greybrook Sterling Inc., 2020 ONSC 3840 [Ritchie].
3 Ritchie, supra note 2 at para 3. 
4 Ritchie, supra note at para 4. 
5 Warranty for Delayed Closing or Delayed Occupancy, O Reg 165/08.
6 O Reg 165/08, supra note 5 at section 6.
7 Ritchie, 2021 ONCA 214, supra note 2 at 4.