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Lease Condition: How to Get Out of a Sale…

By October 29, 2013January 20th, 2022Leases

So you’re looking to get out of purchasing a dental practice. So you turn to your agreement of purchase and sale and read something – probably heavily laden in legalese – that says, if you don’t end up getting a new lease (or perhaps an assignment of the existing lease) from the Landlord, then you don’t have to complete the deal. So you think…hmmm…could this be a way out?

Well, in the case of Hickey v. Complete Dental Care Corp., [2000] O.J. No. 4359, a pair of dentists (Dr. Andrew Liaw and Dr. Stan Won) backed out of purchasing a dental practice after receiving advice from their lawyer (Mr. Ernie Kung). They saw the goodwill in the practice being eroded (apparently, two employees were improperly soliciting patients in the practice) and wanted out. The advice they received from their lawyer was that a lease condition could help them get out of the deal.

As an aside, this case was part of a much larger case which involved the two dentists being sued for damages suffered by the selling dentist (one Ms. Finder) and a hygienist (one Ms. Hickey) who was terminated without the requisite notice or payment in lieu of notice; and all of this resulted because the two dentists did not complete the purchase and sale transaction. Now, the two dentists settled their case against Ms. Finder and Ms. Hickey and sought contribution (i.e. payment) for negligence from their lawyer. So they sued their lawyer and asked the Court to have him pay $30k to Ms. Finder (for breach of contract) and $5k to Ms. Hickey for inappropriate termination. They also asked the Court to find Mr. Kung responsible for paying for their costs.

So the question to be determined by the Court was this: did Mr. Kung provide negligent advice? Did the two dentists rely on Mr. Kung’s advice to their detriment? The two dentists argued that they could not have walked away from the deal and only breached completing the deal based on his advice. For his part, Mr. Kung testified that he only tried to help the two determined dentists with their plan to get out; he never guaranteed them with ironclad ways to get out of the deal.

And so, Mr. Kung looked to a clause dealing with a lease condition. Here’s the condition (verbatim) that was in favour of the two purchasing dentists:

The Vendor obtaining and delivering to the Purchaser an acknowledgement from the Landlord that the lease is a good, valid and subsisting lease, which has not been altered, modified or amended and that there is no set-off or claim against the Tenant by the Landlord with respect to the lease as of the closing date and the Vendor obtaining at his expense and delivering to the Purchaser at or before the time of closing the written consent on terms satisfactory to the Purchaser of the Landlord to the assignment of the lease of the premises to the Purchaser, along with an Assignment of the Lease duly executed by the Vendor or the Purchaser entering into a new lease agreement on terms satisfactory to the Purchaser.

So the basic idea here is that if this condition wasn’t met prior to the closing, then the two dentists would not be obligated to close the deal and buy the practice. Mr. Kung believed that this clause could be read in his clients’ interests. Now the Court recognized that this clause is difficult to understand, but Mr. Kung argued that it allowed them to receive the written consent of the Landlord on terms that were satisfactory to them, or were entitled to negotiate a new lease agreement on terms that were satisfactory to them. The failure to obtain either relief provided the purchasers with the legal right not to close the agreement.

The Court eventually sided with Mr. Kung and dismissed the case against him. In coming to that conclusion, the Court noted the following:

9 At the outset, it must be recognized that the dentists are intelligent and perceptive individuals. They may not be the most experienced businessmen but nonetheless are quite pragmatic and clever. Their intelligence and pragmatism are factors in this Court’s conclusion.

28 The dentists were not successful in their negotiations for a new lease with the Landlord. Mr. Kung testified that the Landlord’s consent was also not on terms satisfactory to the Purchaser.

29 Mr. Macaulay, counsel for the dentists, argued vigorously that Mr. Kung’s interpretation of paragraph 9(f) was absurd. Mr. Macaulay asserted that Mr. Kung’s interpretation would necessarily lead to the conclusion that the dentists would be able to walk away from the deal under any circumstance where the consent or lease did not meet with their approval. Such an interpretation would offend the general principle that parties to an agreement must negotiate in good faith and with reasonableness.

30 It seems plausible that clause 9(f) gives to the purchasers a discretion to accept or reject the consent and/or new lease provided by the Landlord if the terms are not satisfactory to the Purchaser. The wording seems to support that discretion. The law is clear that the exercise of discretion is subject to the requirements of honesty, good faith, and, often, the exercise of reasonableness. The discretion cannot be exercised capriciously or arbitrarily. On that point, please see the authority of the Court of Appeal in Greenberg v. Meffert et al. (1985), 50 O.R. (2d) 755, leave to appeal to S.C.C. refused at (1986), 56 O.R. (2d) 320, and Marshall v. Bernard Place Corp., [2000] Carswell Ont. 3163 (S.C.J.).

31 There is no dispute between the parties that Mr. Kung advised his clients that they must act in good faith. The dentists wanted certain conditions included in the terms of the Landlord’s consent namely, a rent reduction, the ability to sublet, exclusivity, and signage. The Landlord would not agree to these requests. Although the requests of the dentists were significant, this Court does not reach the conclusion that they were either arbitrary, or capricious, or dishonest. All of the proposed changes would have led to a probable improvement in the bottom line of the business.

35 This Court does not conclude based upon the language of paragraph 9(f) that Mr. Kung’s position is unreasonable. Even though the dentists were not dissatisfied with the Landlord’s unwillingness to negotiate a new lease, this Court does not reach the decision that their refusal to close the transaction was made in bad faith, was unreasonable and/or was dishonest.

37 For the above-mentioned reasons, this Court concludes that the dentists have not satisfied this Court on a balance of probabilities that their solicitor did not exercise reasonable skill and care in providing advice to them concerning the interpretation of the lease. This Court concludes that the evidence does not support the conclusion that Mr. Kung’s actions fell below the standard of a reasonably competent practitioner in the field of corporate/commercial transactions. This Court has decided that the solicitor’s advice was neither patently wrong nor unreasonably held in the total circumstances of this case. It cannot be said that the meaning of paragraph 9(f) is so free from doubt that it can be determined that the solicitor’s advice was incorrect. In addition, because Mr. Kung qualified his conclusions and only asserted that he had found a strong argument in favour of his clients, it cannot be said that the solicitor warranted the correctness of the advice provided. For the reasons indicated, the dentists’ claim has failed.

Moral of the story:

  • Make sure your agreement of purchase and sale is clearly drafted in your favour and gives you ways out of buying (i.e. conditions which must be met first before you close the deal).
  • Make sure that you exercise your discretion honestly, in good faith, and reasonably. Discretion cannot be exercised capriciously or arbitrarily. In this case, the two dentists made certain requests that the Landlord wouldn’t agree to. These requests were significant and were not arbitrary, capricious or dishonest.
  • Have a paper trail documenting your negotiations.
DMC