In Quebec, good faith is more than just an abstract concept. It is explicitly outlined in the Civil Code and plays a vital role throughout the entire real estate acquisition process. The duty to act in good faith is especially important during the due diligence phase. The actions of all parties involved can significantly impact this sensitive period. How? Everything hinges on good faith. So, what does good faith mean in practical terms for buyers and sellers?
Due Diligence: Key Considerations
In a real estate transaction, the due diligence period is critical. It allows the buyer to thoroughly inspect the property and identify potential issues before finalizing the purchase. Collaboration and transparency are key here. Sellers must not only provide all relevant information promptly, but are also expected not to conceal anything or to hinder the process. Meanwhile, buyers must use the due diligence period effectively and avoid waiting until the last minute for verifications, especially when information provided by the seller warrants further investigation. Effective due diligence is crucial, and requests to extend this period may be met with resistance, especially if the seller has fulfilled their good faith obligations.
The Concept of Good Faith and Due Diligence in Quebec
In Quebec, the principle of good faith applies from the outset, even before a contract is formed. This contrasts with the rest of Canada, where good faith obligations typically arise after a contract is established, once an offer is accepted. This distinction is essential, as Quebec courts may consider a letter of intent (usually deemed non-binding) to constitute a contract or may apply good-faith principles to pre-contractual negotiations even in the absence of a formal agreement. A notable example is the 2020 Wykanda case, where sellers claimed a document was merely a non-binding letter of intent. However, the Superior Court of Québec ruled that the facts—nine months of intensive negotiations and multiple amendments to the letter—indicated the creation of a purchase offer, thereby imposing obligations of good faith, loyalty, and collaboration. By withholding indispensable information and making false representations, the sellers breached their duty of good faith and were severely sanctioned by the court.
In the 2021 Gotham case, another significant ruling, the Superior Court of Québec sided with a seller who denied a buyer's request to extend the due diligence period. The court's decision was based on the seller's exemplary conduct throughout the process. The seller was transparent from the outset, clearly disclosing the property's contamination issues and providing all requested documents to the buyer in a timely manner. The court found no evidence of malicious intent or excessive and unreasonable conduct by the seller that would have breached the requirements of good faith. As a result, the court concluded that there was no reason to extend the due diligence period and that the seller was entitled to refuse the buyer's request.
Avoiding a Legal Nightmare
To prevent your real estate transaction from becoming a legal nightmare, follow these practical tips:
- For Buyers:
- Prepare in Advance: Don't let time slip away. As soon as the due diligence period begins, actively engage in the process and respond promptly to the information provided to you.
- Avoid surprises: If you anticipate that certain verifications, such as a geotechnical study, may require extra time, negotiate a longer due diligence period from the outset.
- For Sellers:
- Be Transparent from the Start: Promptly share any information that could impact the buyer's due diligence process. This proactive approach makes it more challenging for the buyer to claim the seller's fault if they fail to respond diligently to the provided information.
- Collaborate: Provide all required documents on time and maintain a cooperative attitude throughout the buyer's due diligence period.
Conclusion
In Quebec, good faith is more than just a moral guideline; it is a legal requirement that applies to all parties as soon as negotiations are firmly underway. During the due diligence phase, the obligation of good faith may seem to weigh more heavily on the seller, who must provide relevant information and collaborate throughout the process. However, buyers also have obligations: they must respond promptly to the information provided and proceed diligently with the process. It can be hard to identify behaviour that deviates from the principle of good faith. Unreasonable or excessive actions may indicate a lack of good faith, which can be condemned by the courts. To avoid legal pitfalls, it is essential for all parties to be proactive and to prioritize transparency, collaboration, and timely communication.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.