A recent case from the British Columbia Court of Appeal (Do v. Nichols) confirms that courts will be reluctant to refuse to enforce an onerous term in a contract simply because it is "unfair" to the property owner.
The parties entered into a contract of purchase and sale of land for $1.7 million. The sale was premised on the assumption that the vendor would subdivide the land. Accordingly, one of the terms in the agreement provided that if the vendor failed to subdivide the property by a certain date, the vendor would pay $500,000 to the purchaser (the "Subdivision Clause"). The parties also executed a mortgage agreement that contained the same Subdivision Clause. The mortgage was registered against other property owned by the vendor. The vendor did not successfully subdivide the property by the deadline and the purchaser commenced foreclosure proceedings under the mortgage. At trial, the B.C. Supreme Court held that the Subdivision Clause was an unlawful "penalty" and that it was otherwise unenforceable because it was "unconscionable" (i.e. extremely unfair to the vendor). The purchaser appealed.
The Court of Appeal held that the trial judge was wrong not to enforce the Subdivision Clause. First, the trial judge erred in concluding that the provision was an unlawful penalty. A contractual provision is only an unlawful penalty if it is triggered upon breach of the contract (and even then, it will only be set aside if the liquidated damages payable are not a "genuine pre-estimate of damages"). In this case, the Subdivision Clause was not triggered upon a breach of the contract but rather upon the non-occurrence of a specified event (subdivision). Because the vendor was not contractually obligated to subdivide, there was no penalty.
The Court of Appeal also held that the Subdivision Clause was not "unconscionable". A contractual provision is unconscionable if it is substantially unfair to one party and was only included in the agreement due to the inequality of bargaining power between the parties. The Court found that the Subdivision Clause was not substantially unfair. In essence, the agreement as a whole provided for two purchase prices, depending on whether subdivision occurred: $1.7 million if it was subdivided and $1.2 million if it was not subdivided. There was nothing unfair or unreasonable in providing for a $500,000 difference in value. The Subdivision Clause was merely the mechanism through which the purchaser would recoup this difference in value if subdivision did not take place. Accordingly, the Court held that the Subdivision Clause was enforceable and allowed the appeal.
This case demonstrates that even where a provision in a mortgage agreement or contract for purchase or sale appears quite onerous on its face, the Court will still give effect to the provision in most circumstances. The Court will consider the impugned provision in relation to the purpose underlying the agreement as a whole, and will view the fairness of the provision from the perspective of both parties, including the party seeking to enforce the provision.