Imperial General Properties Limited v. Her Majesty the Queen, [1983] CTC 42, 83 DTC 5059

Dubé, J:—The main issue to be resolved here is whether the sale of the plaintiff's property to one Jack Mendlewitz took place on October 29, 1968 as alleged by the plaintiff, or on September 10, 1970 as assumed by the Minister, and therefore whether the profit in the amount of $633,727 realized by the plaintiff was realized by him in his taxation year 1968 or in his taxation year 1970.

The property in question is situated in the Borough of Scarborough, in the Municipality of Metropolitan Toronto, at the intersection of Birchmount Road and Sheppard Avenue East. The property was purchased in the year 1967 by Brampton Realty Limited (“Brampton”), now amalgamated into the plaintiff company. On October 29, 1968 Brampton agreed to sell the property to Jack Mendlewitz. The monetary terms of the agreement of purchase and sale (hereinafter the “original agreement”) dated October 29, 1968 were that the purchase price was $844,250 to be paid as follows: $20,000 on signing the agreement, $50,000 on October 31, 1968, $145,000 upon registration of a plan of subdivision concerning Mendlewitz’ proposed development of the property, and the balance “as then determined” by way of two mortgages back to Brampton once certain conditions have been fulfilled.

The opening paragraph of the original agreement reads as follows:

The undersigned, JACK MENDLEWITZ (as Purchaser) hereby agrees to and with BRAMPTON REALTY LIMITED (as Vendor) through Drillich & Company Realty Limited, agent for the Vendor, to purchase all and singular the lands and premises owned by the Vendor lying in the Borough of Scarborough, being on the north side of Sheppard Avenue East and the East Side of Birchmount Road, and being sufficient lands for two apartment buildings containing 307 suites (each site of approximate equal size), one of which sites is at the corner of Sheppard and Birchmount Avenues, at the price or sum of EIGHT HUNDRED AND FORTY-FOUR THOUSAND TWO HUNDRED AND FIFTY DOLLARS ($844,250.00) of lawful money of Canada, payable as follows.

The agreement provides that the said purchase price is based upon the sum of $2,750 per suite for 307 suites, and that after the registration of the plan of subdivision, building permits will be secured for the construction of two apartment buildings containing the 307 suites, with a gross minimum area of 900 square feet for each suite.

The following paragraph reads as follows:

This agreement is conditional upon the following conditions, and if the same are not fulfilled within two years from the date of closing the Purchaser must either complete the within transaction and waive such unfulfilled conditions, or terminate the within transaction, in which event he shall be entitled to the return of any and all moneys paid hereunder without deduction and without interest.

The four conditions are to the effect that: (1) the Borough will zone the subdivision to permit the construction of the buildings; (2) the soil conditions will allow for the construction of the buildings with no increase in costs; (3) the lands will be fully serviced; and (4) the subject property will be approved by Central Mortgage and Housing Corporation for mortgage purposes.

That paragraph (paragraph 4) concludes as follows:

.. . Provided that if such conditions are not satisfied within one year from the date of closing the purchaser can declare the within agreement null and void in which event he shall be entitled to a return of all monies paid hereunder.

The agreement then provides for the remainder of the purchase price “as then determined” to be payable by way of two separate mortgages. Each paragraph dealing with the two separate mortgages includes a clause to the effect that the mortgagor (Mendlewitz) shall have the privilege of demolishing any buildings standing on the subject property and to commence construction, “such demolition and/or construction being deemed an act of waste so as to cause the said mortgage to be considered in default”. A proviso to the same effect appears earlier in the document, in the paragraph dealing with the payment of the balance of the purchase price. On the last page of the eight page document it is provided that “the purchaser shall at all times have access to the construction site to enable the purchaser to carry out construction on the said lands”.

The original agreement was followed by an agreement dated August 8, 1969 between Jack Mendlewitz as purchaser and Imperial General Properties Limited as vendor. This agreement acknowledges the original agreement and refers to the amalgamation of Brampton by the Plaintiff.

This agreement also provides that “if prior to the commencement of construction of the apartment buildings . . . the purchaser [Mendlewitz] receives an acceptable bona fide offer to purchase from any party . . . [it] shall give the vendor [the plaintiff] . . . the prior option to purchase” at the price of the bona fide offer.

A further agreement of purchase and sale, dated September 9, 1969, was entered into between the plaintiff and Mendlewitz dealing with additional lands adjacent to the subject property for the price of $289,250. That agreement is also conditional upon certain conditions to be fulfilled by October 29, 1970, or for the purchaser to terminate the transaction or to waive the unfulfilled conditions. This agreement further provides that default by the purchaser or the vendor under the within agreement shall constitute default under the original agreement.

On September 10, 1970, Mendlewitz authorized and directed the plaintiff to engross a deed in favour of Palmyra Holdings Limited and a deed in favour of St. Giles Developments Limited, two parties to which had been assigned each a portion of the subject property by Mendlewitz. The actual transfers under the Ontario Land Titles Act are dated September 9, 1970.

A statement of adjustments, dated September 10, 1970, shows the total purchase price of 307 suites and 83 suites to be $1,070,750, from which sum are deducted several mortgages leaving a “balance due on closing payable to Imperial General Properties Limited” of $154,000.

The actual adoption by the council of the Borough of the Board of Control recommendations to amend the subdivision agreement, as requested by the plaintiff, is dated September 14, 1970, and is transmitted by the plaintiff's attorneys to Mendlewitz’s attorneys on September 22, 1970.

Many other documents were filed at the hearing, but the essential elements of the case, as I assess the situation, are as outlined and afford a sufficient background against which to appreciate the arguments of both parties and to arrive at a decision.

The plaintiff’s principal submission is that the property was sold on October 29, 1968 or was deemed by virtue of subsection 85E(1)* [1] of the former Income Tax Act to have been sold by that date. The plaintiff adds that paragraphs (a) and (b) of subsection 85B(1)f [2] of the former Act required Brampton to include in its 1968 income the $70,000 it had received from Mendle- witz as down payment in 1968, and the $774,500 balance receivable from Mendlewitz on account of the property. He further says that it matters not that the original contract of sale was subject to conditions, because those conditions were subsequent.

In the alternative, the plaintiff alleges that the Consideration under the Original agreement was partly for the sale of the property and partly for the plaintiff’s assistance in developing the property. He submits that subsection 85E(2)$ [3] of the former Act prescribes the method for making the required allocation. He adds that properly to compute Brampton’s 1968 income there should have been an allocation of the consideration between the property Brampton was selling and the assistance it agreed to render. I will deal with the alternative later in my judgment, if it remains useful so to do.

On the other hand, the Minister submits that the plaintiff realized a profit in the sum of $633,727 in its 1970 taxation year, in which year certain conditions precedent to the sale of the property were fulfilled, after which the balance of the purchase price was received and the property was transferred to Mendlewitz.

The whole issue rests on the determination as to whether the conditions of the sale were conditions precedent or conditions subsequent. It therefore becomes necessary to return to the basic common law principles in the matter.

Prior to the English Sale of Goods Act of 1893 the Courts used the expression “condition precedent” to refer to a term in a contract by virtue of which the contract could be postponed, or not take effect, unless or until a certain event or occurrence took place. That condition was also called “suspensive” because it suspended the potential operation of the contract. The expression “condition subsequent” referred to a term in a contract by virtue of which the contract could be rendered invalid and non-binding ab initio, if a certain event or occurrence happened. That condition was also called “resolutive” because it acted to dissolve or render ineffective a contract that had already become operative.* [4]

Halsburyt [5] defines the word “condition” as follows:

A contractual promise may be either absolute or conditional. A conditional promise is one where the liability to perform the promise depends upon some thing or event; that is to say it is one of the terms of the contract that the liability of the party shall only arise, or shall cease, on the happening of some future event, which may or may not happen, or one of the parties doing or abstaining from doing some act.

An instance of a condition precedent can be found in The Mihalis Angelos, [1970] 3 All ER 125, where the expected readiness of a chartered ship to load was found to be a condition precedent of the charterparty. An instance of a condition subsequent is found in the case of Smallman v Smallman, [1971] 3 All ER 717. There an agreement between husband and wife in the process of divorce “subject to approval by the Court” was held to be a binding agreement “right away”, but to become invalid if the Court did not approve. Lord Denning, MR said that the agreement was suspended in operation until the Court approved its terms, but in the meantime neither party could disavow it.

If the condition is a true condition precedent there is no contract until it is satisfied, whereas if the condition is a condition subsequent, then in event of its non-fulfilment there may still be a binding contract upon the parties. A distinction between the two conditions seems to lie in the fact that if, on its true construction, a term is a condition precedent its performance cannot normally be waived unilaterally by either party. (See Barnett v Harrison, [1971] 3 OR 821.

Contracts for the sale of land often include a provision that the performance of the obligation of the vendor, or the purchaser, or both, is conditional upon the happening of some event beyond their control, for example the express condition that the subject property will be rezoned by a local authority for the uses intended for it by the purchaser. The Supreme Court of Canada in Turney v Zhilka, [1959] SCR 578 in 1959 has held that such a “true condition precedent”, even if included in the contract solely for the benefit of the purchaser, cannot be waived by that party, and the vendor is thus free to treat the contract as at an end and may resell the property to somebody else. That contract did not include an express clause to the effect that the purchaser could waive the condition and take the land as is, without the desired rezoning. Of course, such is not the situation in the case at bar.

The rule in Turney v Zhilka was reaffirmed by the Supreme Court in F T Developments Limited v Sherman, [1969] SCR 203, O’Reilly v Marketers Diversified, [1969] SCR 741, and Barnett v Harrison, [supra). That rule defined a “true external condition precedent” as being an external and uncertain future event upon which the contractual obligations of both parties depend, such as the sale and purchase of land, subject to the land being rezoned. In other common law jurisdictions the jurisprudence is to the effect that if a condition is inserted for the benefit of one party, that party may waive it, whether or not there is a waiver clause in the contract.* [6]

What concerns us here, however, is not the waiver issue — which is explicitly resolved in the agreement in favour of the purchaser — but the determination as to whether the conditions in the agreement are true conditions precedent.

In my view, they are not. Three elements in the agreement indicate the intention of the parties to allow for the possibility to complete the agreement before and without the fulfilment of the conditions.

Firstly, the mortgage clauses in the agreement extend to the purchaser the privilege to demolish buildings standing on the land and to commence construction before the final closing and the transfer of legal titles: “The purchaser shall at all times have access.”

Secondly, a proviso allows the purchaser to accept a bona fide offer to purchase from any party (with prior option to the plaintiff) prior to the commencement of the construction.

Thirdly, the agreement includes a waiver allowing the purchaser “to waive such unfulfilled conditions” and to complete the transaction. Such a waiver was considered by Hartt, J. in Genern Investments Ltd. v Back et al, [1969] 1 OR 694, wherein he said at 699:

.. .the agreement itself expressly gave to the purchaser a right of waiver and the contract was thereby made conditional upon the municipality rezoning the land unless so waived by the purchaser. This power of waiver takes the condition outside the realm of a true condition precedent for the purchaser was given the express right by the vendors to relinquish that benefit. The rezoning condition did not form the basis for completion of the contract because the parties consented to the possibility of its waiver by the purchaser. The vendors having so agreed cannot now claim that the performance of the agreement terminated solely on the enactment of a rezoning by-law.

In Dennis v Evans, [1972] 1 OR 585, Addy, J (then of the Ontario High Court of Justice and now of this Court) ordered specific performance where a proviso entitled the purchaser to waive the condition and where the condition was for the benefit of the purchaser. He distinguished the Genern Investments decision from the Turney v Zhilka decision.

My conclusion, therefore, is that the conditions were not true conditions precedent and therefore that the property in question was sold by the plaintiff company in its taxation year 1968. Under the circumstances it becomes unnecessary for me to consider the alternative proposition of the plaintiff. The subject reassessment shall therefore be varied or vacated accordingly. Judgment in favour of the plaintiff with costs.