Five Tips to Prevent Breaches of the Duty of Honest Performance in Commercial Real Estate Transactions

The current pandemic has no doubt set the stage for the introduction of interesting and important statutory changes and case law. This is particularly true for the commercial real estate market. With all the volatility in this sector, it is critical for parties to keep in mind the lessons learned in the landmark Supreme Court of Canada (Court) decisions of Bhasin v. Hrynew (2014) (Bhasin) and C. M. Callow Inc. v. Zollinger (2020) (Callow). In Bhasin, the Court recognized a duty of honest performance and set out the organizing principle of good faith contractual performance, which requires parties to act “honestly and reasonably and not capriciously or arbitrarily” when performing their contractual responsibilities. Callow then applied the principle of good faith and the duty of honest performance to a dispute relevant to the commercial real estate world involving the termination of a maintenance contract for a condominium.

From a review of Bhasin and Callow and related lower-court cases, five practical guidelines can be extracted that will help contracting parties in commercial real estate transactions to comply with their duty:

1. Coordinate your communication. It is important that communications with contractual counterparties be consistent.  If there are multiple people in your organization communicating with a counterparty (or if a broker or other agent is communicating on your behalf), care should be taken to ensure that everyone understands your organization’s position, particularly in respect of major contractual points.

2. Consider staying silent. Sometimes, the easiest way to avoid a miscommunication with a counterparty is to encourage people in your organization to stay silent. This can be particularly true if your organization is in the process of deciding what to do with a given contract or counterparty, such as whether to terminate or renew a contract, which was the nature of the dispute in Callow.

3. Drafting matters. While parties cannot contract out of the duty of honest performance, the duty can be limited by clear language within a contract.  For example, a court will consider the existence of an entire agreement clause or an “as-is where-is” clause when determining whether pre-contractual communications in a sale of real property created a breach of the duty, so vendors would be well advised to try and include these clauses in their contracts.

4. Consider the sophistication of your counterparty.  The sophistication of your counterparty will be relevant to a court’s determination of whether the duty of honest performance has been breached, so even more care should be taken to act honestly and reasonably when dealing with inexperienced counterparties or those unrepresented by legal counsel when your organization is so represented. 

5. Mistakes happen, but they should be corrected promptly. If a member of your organization unintentionally misleads a contractual counterparty, the best next step is to clearly correct the counterparty’s mistaken belief as soon as possible. A clear and prompt correction may reduce or eliminate any damages that would otherwise flow from the breach of the duty of honest performance.

Have more than five minutes, contact Patrick Gordon, Rachel Lehman or any other member of our Commercial Real Estate group to learn more. You can also check out our recent webinar on New Developments in Canadian Real Estate Case Law for more on the cases related to the above updates.