Is Time on Your Side? Best Practice for Purchase Contract Date Extensions
The "time is of the essence" clause in a standard purchase contract is often treated as boilerplate, but this short, simple statement can be critically important, as it makes it "essential" that the parties perform their obligations by the relevant dates and times specified in the contract (e.g., the date by which a deposit must be paid or closing must occur). What is not well understood is that, if the parties subsequently agree to extend a date specified in the contract, they may lose their ability to rely on the "time is of the essence" clause. This somewhat surprising result arises from the decision of the British Columbia Court of Appeal (BCCA) in Salama Enterprises (1988) Inc. v. Grewal, 1992 CanLII 4035 (Salama).
In Salama, the purchase contract included a "time is of the essence" clause, and after the parties signed it, they agreed to extend the closing date by one month. This change was marked onto the original purchase contract and initialled by the parties. The vendor refused a later request for a further oneday extension, the purchaser did not close on the date agreed upon in the contract, and the vendor terminated the contract in reliance on the "time is of the essence" clause. The purchaser then sought specific performance. The BCCA ruled that where time is of the essence and the parties subsequently agree to extend the time for performance of an obligation, a court may decline to give effect to a "time is of the essence" clause if insisting on strict compliance would be unjust or inequitable. The BCCA found that, given the particular facts, allowing the vendor to rely on the "time is of the essence" clause would have led to an unjust or inequitable result. The Court ordered specific performance and the purchaser received the property.
The BCCA revisited Salama recently in G-8 Properties Inc. v. Fort St. John Retail, 2013 BCCA 353 (G-8 Properties). In G-8 Properties, the purchase contract included a "time is of the essence" clause, and the parties later entered into various amending agreements regarding a subdivision the vendor needed to complete before closing. The last amending agreement further extended the closing date and included up to four automatic 30-day extensions. On the day the last extension period expired, the vendor was unable to complete because of subdivision delays; thereupon the purchaser purported to terminate the contract and demanded repayment of the deposit. The trial judge found in favour of the vendor but the BCCA overturned her decision, ruling that where the extension of time was built into the contract itself, a party could rely on a "time is of the essence" clause and terminate the contract.
It is doubtful that G-8 Properties will resolve the uncertainty created by Salama. The key fact in G-8 Properties was that the parties had drafted a contract amendment that contemplated in advance several possible closing dates up to six months in the future; in practice, parties often negotiate extensions of time in purchase contracts as the need arises, as occurred in Salama.
Presumably, a court would only rarely find the type of injustice or inequity that would lead it to relax the strict enforcement of a "time is of the essence" clause. In fact, the case law indicates that only a few decisions have relied on Salama to justify such an exercise of judicial discretion. However, to guard against such a result, parties should take care in how they implement a date extension in a purchase contract. In Salama, the parties effected the amendment by marking up and initialling the original purchase contract. Instead of that approach, parties should prepare a supplementary amending document that confirms that time remains of the essence. This would make it clear the parties had again turned their minds to the issue of whether time was to remain of the essence when agreeing to the extension of time.