Principal Issues: Where property is sold and the purchaser assumes debt as partial consideration, may the vendor, in computing the "proceeds of disposition", include an amount equal to a penalty amount (early termination penalty clause) that may become payable to the lender of the assumed debt by the debtor at some future time on the happening of an event that may or may not occur.
Position: General comments.
A contingent liability that may be triggered at some future time by the then current debtor is an obligation and not property and as such is not considered as part of the sale price of property sold and should not be included in computing the proceeds of disposition.
Reasons: In the present case the early termination penalty clause provides for a penalty to be imposed on the borrower in the event of repayment of the loan before maturity. This type of arrangement is a contingency, meaning that it is intended to apply on the happening of an event (the early termination) which is not certain to occur and in fact will not occur unless the borrower chooses to repay the debt before its maturity.
Where a purchaser assumes an existing debt as part of the sale price for property acquired, no repayment on the debt has occurred and as a consequence the early termination penalty clause would not be triggered. In circumstances where the early termination penalty clause has not been triggered, no amount is exigible by the lender from the borrower under the said penalty clause.
No amount is owing in respect of the contingent penalty clause on the assumed debt and therefore, no amount relating to the contingent liability should be added to the proceeds of disposition on the pretext that it a "debt" being assumed by the purchaser.