Is ‘time of the essence,’ legally speaking, in a residential real estate transaction? Past precedents suggest it is and that deadlines must be adhered to.

Virtually every real estate purchase agreement contains a clause which says that time is of the essence of the contract, but what does it really mean?

An explanation of this term provides a good opportunity to discuss my all-time favourite court decision – Union Eagle Ltd. v. Golden Achievement Ltd. The case originated in Hong Kong when it was a British colony and ended up before the Privy Council in London, which was the highest court in the British Commonwealth.

The case centered around the principles of good faith, greed and time being of the essence.

The dispute arose out of a seemingly ordinary real estate agreement in which Union Eagle agreed to purchase a luxury flat in Hong Kong from Golden Achievement for HK$4.2 million, about $550,000 Canadian in 1991. The buyer paid a 10 percent deposit – about C$55,000.

Closing was to take place by 5 p.m. on September 30,1991 and time was stated to be “of the essence of the agreement.” If the purchaser failed to comply with any terms of the agreement, the deposit money was to be forfeited and the property could be resold.

Late on the closing day, the buyer’s solicitor sent a messenger with the cheques for the purchase money to the seller’s solicitor’s office, but unfortunately the messenger was caught in traffic and arrived ten minutes late. The seller instructed the solicitors to rescind the contract. The envelope and contents were returned to the messenger.

The purchaser sued for completion of the transaction or return of the deposit. Declining to adopt the principles of fairness or equity, the trial court, the appeal court and ultimately the Privy Council all ruled in favour of the seller. They relied on practical business considerations and ancient authority to uphold the strict wording of the contract.

Should the courts have intervened to give a purchaser a break when it was only 10 minutes late in delivering funds? For better or for worse, the Privy Council said that the rules of equity and fairness will not come to the rescue when a seller terminates a contract because the buyer failed to comply with an essential written condition as to time.

A few months after the court’s decision, the flat was sold for HK$19.5 million (about C$2.5 million) – five times the original purchase price, and eight times the original cost in March 1991, and all because of a 10-minute delay. The seller was allowed to profit by HK$15million because of the delay.

Writing in the Hong Kong Law Journal in 2000, Toronto lawyer Mitchell Kowalski suggested that the decision was wrong, and the courts should have relied on the concepts of good faith, unconscionability, and the old maxim that the law does not concern itself with trifles.

Fortunately, some Canadian courts in recent years have adopted a kinder, more gentle approach to time deadlines, but parties to real estate contracts should still be aware of the risk of a strict application of time deadlines in their agreements.