Do v. Nichols, 2015 BCSC 1069

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Do v. Nichols, 2015 BCSC 1069 Date: 20150622 Docket: H131183 Registry: Vancouver Between: Nam Nha Do Petitioner And Charles Larry Nichols, Linda Grace Nichols, and the Bank of Montreal Respondents Before: The Honourable Mr. Justice N. Smith Reasons for Judgment Counsel for the Petitioner: D. Unterman J. Malik Counsel for the Respondents, Nichols: R.R. Lee Place and Date of Trial/Hearing: Vancouver, B.C. April 13-16, 2015 Place and Date of Judgment: Vancouver, B.C. June 22, 2015 Table of Contents I. The Sale and the Mortgage .. 3 II. Subsequent Events .. 6 III. Contractual

Interpretation Issues .. 8 IV. Waiver .. 9 V. Penalty and Unconsciounability .. 11 [ 1 ] The petitioner Nam Do seeks an order nisi of foreclosure on a mortgage, with a one-day redemption period and an immediate order for sale of the subject property.

The petition was referred to the trial list by order of Skolrood J. on May 28, 2014. [ 2 ] The mortgage at issue is registered against two properties owned by the respondents, Charles and Linda Nichols, in Pender Harbour, BC, but arises from an agreement for sale and subdivision of two other, nearby properties. [ 3 ] The properties subject to the mortgage are described as lot A and lot B of block 58 and include the respondents’ home (collectively the “Residential Property”). The respondents also own two waterfront properties described as blocks 60 and 61 (collectively the “Development Property”).

The respondents’ son Kristopher Nichols lives on the Development Property and operates a small marina there. [ 4 ] The petitioner agreed to purchase the Development Property from the respondents, but the agreement required the respondents to do what was necessary to subdivide the property. The respondents agreed to pay the petitioner $500,000 if they failed to complete the subdivision and gave the mortgage on their Residential Property to secure that obligation. I. The Sale and the Mortgage

[ 5 ] The Development Property is approximately 85 metres wide and 400 metres deep, bordered by the waterfront on the west and Stone Road on the east. Another road, Francis Peninsula Road, crosses the property near its western end, so that about one quarter of the property lies between Francis Peninsula Road and the shoreline. [ 6 ] On December 16, 2010, the respondents and the petitioner entered into an agreement under which the petitioner was to purchase the Development Property for $1.7 million (the “December Agreement”).

That agreement required the respondents to take the necessary steps and pay the costs to subdivide the property in order to create two waterfront lots to the west of Francis Peninsula Road. Once subdivision was approved, the petitioner would retain the waterfront lots (referred to in the agreement as lots A and

B) and convey the larger, non-waterfront portions (referred to in the agreement as remainder 60 and remainder 61) back to the respondents. The sale was not completed because the petitioner never removed subject conditions. [ 7 ] Meanwhile, a company called Conconi FT Holdings Ltd., which held a mortgage on all of the respondents’ property, obtained an order nisi of foreclosure, also in December 2010.

The petitioner knew by the time of the December Agreement that the property was “under foreclosure” although there is no evidence that he specifically knew then or later what orders had been obtained. [ 8 ] By June 2011, Conconi had obtained an order absolute of foreclosure, but apparently gave the respondents some additional time to redeem the property.

In that situation the parties entered into a new agreement dated June 22, 2011 (the “June Agreement”). [ 9 ] Like the December Agreement, the June Agreement provided for the petitioner to acquire the Development Property for $1.7 million and gave the respondents the opportunity to re-acquire the non-waterfront portions after subdivision.

However, a number of important new or changed terms were added. [ 10 ] The respondents were required to complete the subdivision by July 31, 2012 (no time limit had been specified in the December Agreement) and to grant to the petitioner an “inter alia mortgage” for $500,000 on their Residential Property. This is the mortgage the petitioner now seeks to foreclose on. [ 11 ] The June Agreement also provided that the petitioner was to obtain an appraisal of the new waterfront lots.

Although this appraisal was to be obtained “[p]rior to the deposit of the Subdivision Plan for registration,” it was “to be conducted as if the lots proposed by the Subdivision Plan had actually been created.” The respondents were required to deposit the subdivision plan for registration within 35 days following the appraisal. [ 12 ] Where the December Agreement provided for the non-waterfront or remainder portions of the property to be automatically transferred back to the respondents after subdivision, paragraph 5(

c) off the June Agreement required the respondents to pay the petitioner $300,000 if they wished to re-acquire that part of the property. Even that price was conditional on the appraised value of the waterfront lots being at least $1.9 million. [ 13 ] Paragraph 5(

d) of the June Agreement said that if the appraised value of the waterfront lots was less than $1.9 million, the respondents could make up the difference with a payment to the plaintiff that would be in addition to the $300,000 they would pay for the non-waterfront property. If the respondents did not make up that difference, or if the they were “otherwise unable or unwilling to carry out the subdivision”: iv) titles to all lots, including Lot A, Lot B, Remainder 60 and Remainder 61, as shown on the Subdivision Plan, will be issued to and registered in the name of the Buyer [the petitioner]; and

v) The Sellers [the respondents] will pay to the Buyer, within 35 days following the Appraisal…the sum of Five Hundred Thousand Dollars ($500,000), failing which the Buyer may enforce its security interest as granted by way of the Inter Alia Mortgage. [ 14 ] In

summary, the December Agreement provided for sale of the Development Property, with the respondents to receive part of it back after they had taken the necessary steps to obtain a subdivision that created two waterfront lots for the petitioner.

The June Agreement put a price of $300,000 on that re-acquisition, provided what amounted to a guarantee by the respondents of the ultimate value of the waterfront lots, required the respondents to pay $500,000 if they did not obtain subdivision within a specified time and required them to secure that obligation with a mortgage on their Residential Property. [ 15 ] The petitioner Nam Do testified that he requested the mortgage to guarantee that subdivision would take place.

The respondent Charles Nichols testified that he had no choice but to agree to the mortgage and the other new terms because the time to prevent Conconi enforcing its order absolute was running out and he had no time to find another buyer. [ 16 ] Although the June Agreement stated that the subdivision was to be “in the manner set out in the subdivision plan attached hereto as

Schedule A,” no subdivision plan is attached to either of the two copies of the agreement that were put into evidence at trial. However, the parties conducted themselves throughout on the understanding that the contemplated subdivision was what had been shown in the subdivision plan that was attached to the December Agreement and neither party made submissions at trial about the deficiency in the documents. [ 17 ] The sale of the Development Property was completed on September 20, 2011. At some point before that, the parties verbally agreed to a $25,000 reduction in the purchase price.

The respondents used the proceeds of sale to pay the debt owed to Conconi. [ 18 ] The mortgage was signed by the respondents on September 20, 2011 and registered against the Residential Property on September 27, 2011. It reproduced the essential terms of the July Agreement, including the respondents’ liability to pay $500,000 if the subdivision did not take place, but extended the deadline for obtaining the subdivision to September 21, 2012. II. Subsequent Events [ 19 ] By September 2012, no application to subdivide the property had been made. During that year, Kristopher Nichols had

continued to occupy the Development Property. The petitioner says Kristopher Nichols agreed to pay rent of $15,000 a month, but had paid for only the first month. On August 28, 2012, the petitioner sent Kristopher Nichols an eviction notice, but gave no evidence of any subsequent steps to enforce it. [ 20 ] Nam Do says that in September 2012 he told Charles Nichols to stop work on the subdivision because the time to complete it was almost up.

Charles Nichols testified that he told Nam Do about the work being done toward obtaining the subdivision and Nam Do said he would “wait and see.” [ 21 ] By then the petitioner knew that the respondents, on the same day they signed the mortgage at issue, had signed another mortgage on the same property to Symmetry 2 Mortgage Investment Corporation. That mortgage had been registered before the petitioner’s mortgage and therefore gained priority over it. [ 22 ] Symmetry filed a foreclosure petition in June 2012, but apparently did not proceed with it.

However, the Symmetry mortgage is relevant because in an affidavit filed in the Symmetry proceeding and dated July 30, 2012, the petitioner referred to his arrangement with the present respondents and said he had not agreed to extend the deadline for subdivision. [ 23 ] The fact that the solicitors who had drafted the petitioner’s mortgage had not registered it in time to get priority over the Symmetry mortgage also gave rise to a possible negligence claim against them. For that reason, they told the petitioner in an email, dated September 22, 2012, that they could no longer act for him.

The petitioner testified that it took him some time after that to retain new counsel. [ 24 ] The position the petitioner took in the Symmetry proceeding, combined with the fact that he was clearly seeking legal assistance in September 2012, is consistent with his evidence that he was not agreeing to an extension of time for the respondents to complete the subdivision and I find that there was no such agreement. [ 25 ] On or about October 19, 2012, Nam Do received a bank draft for $12,000 that had been obtained by Charles Nichols.

A handwritten note by Charles Nichols on the bank draft says “Oct. 20, 2012 mortgage payment.” Charles Nichols testified that Nam Do told him he was having difficulty meeting the obligations he had assumed to finance the purchase. Mr. Nichols said he gave Nam Do money to assist because he didn’t want the property to be lost to foreclosure. He also said he told the petitioner at that time that he was continuing to prepare the subdivision application. [ 26 ] Nam Do says he understood the draft to be a payment toward the rent owed by Kristopher Nichols.

The suggestion that the petitioner accepted it knowing that the respondents would continue preparing their subdivision application was not put to him. [ 27 ] It was not until almost a year later, on September 17, 2013, that solicitors for the petitioner sent the respondents a letter demanding payment of the $500,000 owing under the mortgage. This foreclosure petition was filed on October 8, 2013.

Only after that, on October 17, 2013, did the petitioner receive an email from a land surveyor retained by the respondents asking him to sign subdivision application forms. [ 28 ] There are some material differences between the mortgage document signed by the respondents and the registered mortgage, which was filed electronically without signatures. The registered copy includes, as the signed copy does not, the provision under which he respondents could make up any amount by which the assessed value of the waterfront lots fell short of $1.9 million.

The registered copy also deletes a provision relating to certain collateral security the petitioner had to give to his own bank as part of his own financing of the purchase. It appears that the signed mortgage document had been prepared without reference to some handwritten changes that had been made to the June Agreement. [ 29 ] Counsel for the respondents submits that the difference between the two documents may technically make the registered mortgage unenforceable, but asks the court to decide this matter on its merits as if the registered mortgage was valid.

That is because the petitioner could otherwise simply register the signed mortgage and begin a new foreclosure proceeding based upon it. III. Contractual

Interpretation Issues [ 30 ] Counsel for the respondents argues that the mortgage and the June Agreement did not require payment of any money until after the petitioner obtained an appraisal, which he could have done at any time but did not. While the June Agreement refers to $500,000 being paid within 35 days following an appraisal, it also refers to a subdivision plan being registered within the same 35 days.

Michael Braun, a Ministry of Transportation official who manages rural land subdivision applications in the area, testified that the process for approving a subdivision takes at least four months. [ 31 ] A subdivision plan could clearly not have been prepared, approved and submitted for registration within 35 days of an appraisal.

I agree with counsel for the petitioner that his obligation to obtain an appraisal only arose when a subdivision plan was approved and ready for registration. [ 32 ] I also note that the reference to $500,000 becoming payable 35 days after the appraisal appears in a clause that addresses two possible situations–if the subdivision is not completed or if it is completed and the value of the waterfront lots is less than $1.9 million.

An appraisal could only be relevant to the latter circumstance and would serve no purpose in the absence of a subdivision or active efforts to obtain one. [ 33 ] Counsel for the respondents also argues that the only commercially reasonable

interpretation of the June Agreement and the mortgage is that the respondents’ obligation to pay money to the petitioner arose only after the subdivision was completed and they received back a portion of the property. That is simply not what the documents say. The language is clear that the respondents were to pay $500,000 if they were “unable or unwilling to carry out the subdivision.”

IV. Waiver [ 34 ] I also cannot accept the respondents’ argument that the petitioner, by accepting the bank draft for $12,000 in October 2012, waived his right to rely on the subdivision deadline and was required to serve a notice fixing a new deadline if he wished to re-instate one. The respondents rely on the trial judgment in Hinkson Holdings Ltd. v.

Silver Sea Developments Limited Partnership , 2007 BCSC 118 , rev’d 2007 BCCA 408 , where the court said at para 51: The two essential elements of waiver are full knowledge of one's contractual rights arising from a breach by the opposing party, and an unequivocal and conscious intention to abandon them. The principle underlying waiver is that a party should not be allowed to reverse a choice when it would be unfair to the other party to do so.

Waiver can be retracted on reasonable notice being given to the party in whose favour it operates. [ 35 ] In that case, the plaintiff sought a declaration that a contract for purchase and sale of certain property was valid and subsisting, provided the plaintiff paid the balance owing. The defendant had sent a letter advising the plaintiff that installment payments totalling a little more than $184,000 were overdue and demanded payment by a stated date. Approximately two weeks after the expiry of that new deadline, the defendant provided and the plaintiff accepted a payment of $50,500.

Solicitors for the defendant acknowledged that payment and set a new date for payment of the balance. The court said at para. 67: On July 16, 2005 when the plaintiff presented the payment of $50,500, the defendant had two choices: it could have refused the payment and terminated the Agreement, or accepted the payment.

By accepting the payment, I find the defendant affirmed the Agreement, and abandoned its right to terminate for non-payment of the third instalment of the deposit by any deadline that pre-dated July 16, 2005. (The Court of Appeal reversed the decision because the terms of the contract precluded operation of the common law doctrine of waiver.) [ 36 ] There was no dispute in Hinkson about the purpose of the payment and its relationship to the contract at issue. Here, the parties gave conflicting evidence of what the $12,000 payment was for and the document on its face is at best ambiguous.

It refers to a mortgage payment, but does not make clear what mortgage is being paid. The mortgage at issue did not require periodic payments and the petitioner had not yet made a demand for payment of the full amount. [ 37 ] Charles Nichols may have intended it, as he testified, to assist Nam Do with his own mortgage payments, but the evidence does not establish that the petitioner understood that intention or accepted the money on that basis. In any event, such a payment would not arise from any obligation in the contract.

The evidence falls far short of showing an unequivocal and conscious intention to waive contractual rights. V. Penalty and Unconsciounability [ 38 ] The respondents are on much firmer ground when they submit that the contractual provision requiring payment of $500,000 is either a penalty clause or is unconscionable. Those two concepts are related in that unconscionability can be either a stand-alone ground for setting aside a contract or a factor to be considered by the court in deciding whether to exercise its discretion to relieve against a penalty clause. [ 39 ] In Reliant Capital Ltd. v.

Silverdale Development Corp , 2006 BCCA 226 , the Court of Appeal said at para. 45: The classic definition of penalty is found in Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd ., [1915] A.C. 79 where the House of Lords set out the guiding principles on how to distinguish penalties from liquidated damages. The essence of a penalty is a payment of money stipulated in terrorem of the party in default rather than a genuine pre-estimate of the damage suffered. [ 40 ] In AMT Finance Inc. v.

Gonabady, 2010 BCSC 278 at para. 41 [ AMT Finance ], the court set out the differences between penalties and genuine pre-estimates of liquated damages as follows: Where the sum stipulated for breach of the contract is “extravagant and unconscionable” compared to the greatest loss that could conceivably have occurred, the clause will generally be held to be a penalty.

Likewise, where a single lump sum is awarded to the non- breaching party for any one of several events which vary significantly in terms of resulting damage, the clause is prima facie a penalty: [ 41 ] A finding that a contractual clause is a penalty rather than liquidated damages does not end the matter.

Section 24 of the Law and Equity Act, R.S.B.C. 1996, c. 253 says: 24 The court may relieve against all penalties and forfeitures, and in granting the relief may impose any terms as to costs, expenses, damages, compensations and all other matters that the court thinks fit. An order under s. 24 is discretionary and a penalty clause will only be struck down where it is oppressive or unconscionable: AMT Finance at para. 45 . [ 42 ] The clause in the June Agreement that the petitioner relies on and on which the mortgage is based provides for a payment by the respondents of $500,000 if they did not obtain subdivision.

The petitioner was purchasing the property for $1.7 million and the parties must be taken to have agreed on that amount as a reasonable pre-subdivision value. There is no evidence that the parties had any reason to believe the value would decrease in the absence of future subdivision and no evidence that the property today is worth any less than what the petitioner paid for it. [ 43 ] The only loss the petitioner could suffer as a result of the failure to subdivide would be the loss of any increased value the subdivision was expected to create.

The agreement assumes that the new waterfront lots would be worth at least $1.9 million and

provides for certain consequences if that did not turn out to be the case. There is no evidence of what either the general expectation of increased value or the specific amount was based on. It must be remembered that the two proposed new waterfront lots were simply to be smaller parcels carved from what were already two waterfront properties.

There is no evidence of what, if any, realistic basis existed for assuming those new smaller lots would have a market value of $1.9 million. [ 44 ] Even if the there was a loss flowing from the respondents’ failure to apply for and obtain subdivision, it would be a loss the petitioner could mitigate by applying for subdivision himself.

Unless the resulting delay occurred in a time of a falling market, the recoverable damages in those circumstances would prima facie be limited to the costs of preparing and submitting the application and of registering the subdivision–the costs that should have been borne by the respondents.

There is no evidence to suggest those costs could have been contemplated as being anywhere close to $500,000. [ 45 ] If the property had been subdivided, the petitioner might also have received $300,000 from the respondents in exchange for the non-waterfront lots, but the respondents were not required to complete that transaction. It is more in the nature of an option that the respondents could choose to exercise or not.

In the absence of such a payment, the petitioner would have the right to retain the entire property, which he has in fact done. [ 46 ] Further, the potential obligation of the respondents to pay $500,000 under the agreement was not limited to a breach of contract. The agreement provided that the respondents could be required to pay that amount if after subdivision the appraised value of the waterfront lots was less than $1.9 million and the respondents did not make up the shortfall.

In other words, a shortfall of say, $25,000 or $50,000, could trigger a liability of $500,000 even if the respondents fully performed their obligations under the agreement and the shortfall was the result of market conditions over which the respondents had no control. [ 47 ] The petitioner has given no evidence to suggest there was a genuine pre-estimate of damages and I find that there was not. The petitioner’s own evidence is that the mortgage securing the $500,000 obligation was intended to ensure the subdivision took place. That is precisely the kind of provision that the authorities refer to as in terrorem.

The consequences to the respondents of failing to obtain the subdivision far exceed any damages the petitioner could have expected to suffer and I find the provision is, in fact, a penalty. [ 48 ] Having found the provision to be a penalty, I must now consider whether it was one for which relief should be provided under s. 24 . The test for whether a contract or a provision within a contract is unconscionable was referred to in Connor Financial Services International Inc. v.

Laughlin, 2015 BCSC 587 at para. 22 : A party must establish inequality in the position of the parties arising from the ignorance, need, or distress of the weaker which left him in the power of the stronger, and must establish proof of substantial unfairness in the bargain. [ 49 ] Professor McCamus, in The Law of Contracts (Toronto: Irwin Law, 2005), uses similar language at page 407: In order to set aside a transaction on the ground of unconscionability, one must establish both inequality of bargaining power in the sense that one party is incapable of adequately protecting his or her interests and undue advantage or benefits secured as a result of that inequality by the stronger party. [ 50 ] Professor McCamus adds at page 409 that there are no “rigid limitation” on the circumstances that “might establish that one party suffers from an unusual inability to protect his or her interests.” [ 51 ] The analysis in this case must begin with the December Agreement.

Evidence of negotiations leading to a contract is usually inadmissible, but the December Agreement was, at the time it was signed, a concluded agreement that created rights and obligations as between these parties. They agreed on a price for the Development Property and agreed that if the respondents were able to subdivide it the non-waterfront portion would be returned to them, leaving the petitioner with the smaller but presumably more desirable waterfront lots.

The only consequence for the respondents of failing to get the subdivision was that they would not have satisfied the condition for receiving back part of the property. [ 52 ] The June Agreement added further, much more onerous terms, including the obligation to pay $500,000 in the absence of subdivision. By the time of the June Agreement, the respondents were facing loss of all of their property through the order absolute that Conconi had obtained.

I accept the evidence of Charles Nichols that it was too late to find another buyer and that he had no choice but to agree to whatever new terms the petitioner demanded if he was to have any hope of salvaging anything.

I therefore find the respondents were in a position of weakness and distress amounting to an unusual inability to protect their own interests and the first branch of the test for unconscionability is satisfied. [ 53 ] I find the second branch of the test–substantial unfairness–is satisfied by essentially the same facts I have considered in relation to determining whether the provision is a penalty clause. The amount the respondents were required to pay for failing to subdivide bears no relationship to the real damages the petitioner has shown he expected to suffer or that he has suffered from that failure.

Even more relevant to the question of unfairness is the fact the respondents could have become liable to pay the same amount if they had performed the contract because they were effectively guaranteeing a future market price over which they had no control. [ 54 ] In my view, these are terms that no reasonable party with real bargaining power would accept.

I find that they amount to an undue advantage the petitioner was able to secure only because of the desperate situation the respondents found themselves in. [ 55 ] I therefore conclude this is a proper case to apply s. 24 of the Law and Equity Act and relieve against the penalty set out in the June Agreement and the mortgage. The obligation of the respondents to pay $500,000 is not enforceable. It follows that there is not and cannot be any amount owing under the mortgage that purports to secure that obligation. [ 56 ] The petition is dismissed with costs.

The respondents did not specifically ask for an order directing cancellation of the mortgage charge registered against the property. That consequence would seem to follow as a matter of course, but the parties have liberty to apply if there is any reason to suggest that is not the case.

“N. Smith, J.”