When Is A Consequence A Penalty?

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"