Mixing personal relationships and friendships with business can sometimes result in unfavourable outcomes. While this can be an attractive option given the existing level of trust and understanding between parties, business arrangements between friends can be quite informal, which may lead to issues down the road. Although the topic of shareholder agreements and other business contracts may be difficult or uncomfortable to broach, it is important to address these things proactively to avoid future disputes.

In a recent decision from the Ontario Superior Court of Justice, two friends entered into a commercial real estate deal together which eventually led to one party extending a personal loan to the other. When it came time to collect, the friendship and business relationship between the parties was at risk when the defendant (who received the loan) argued that the plaintiff had not lived up to his end of the deal.

Neighbours go into a real estate together

In the case of Hossain v. Rahim, the parties to the dispute were neighbours who became friends and sought to become business partners. They each owned a house on Thatcher Avenue, however, the defendant rented his house to tenants (the “Thatcher house”). Despite not living in the home, the defendant was often in the neighbourhood and became acquainted with the plaintiff through community events.

Both of their properties were close to a property located at 1733 Kingston Road (the Kingston property”), which was a motel. The parties thought that the motel site, the defendant’s property, and another property located at 60 Thatcher Avenue could be combined and developed into townhouses.

Townhouse project abandoned by parties

In order to acquire the Kingston property and the second Thatcher Avenue property, the plaintiff secured a mortgage. He initially asked the defendant to advance him $100,000, however, this advance was unnecessary and the bank draft was returned to the defendant. After purchasing the two properties, they were transferred to a numbered company (“945”) which the plaintiff owned.

The defendant hired a firm to help design the townhouse project. However, the project did not come to fruition and the parties decided not to pursue their initial plans. Instead, they believed that a new owner could pursue a similar project if they could sell all four of the properties together (that being the two newly purchased properties along with both of their houses). Therefore, it was their hope that each individual property would be more valuable if sold together.

Defendant asks plaintiff for a loan

In January 2018, the parties retained a real estate company to help them sell the four properties together. With no leads, in November 2019, the plaintiff sold the property at 60 Thatcher Avenue, however, the other three properties remained unsold.

Prior to this sale, in May 2018, the defendant approached the plaintiff to inquire about a personal loan for $100,000 because he sought to purchase another property, however, he did not have sufficient funds to cover the down payment. The plaintiff agreed and the property was scheduled to close on June 1, 2018.

Plaintiff inquires about loan repayment

By December 2018, the plaintiff began to ask the defendant about repayment of the loan. He told the defendant that the loan came out of his line of credit and he was paying interest on the loaned funds by mid-January 2019. The defendant responded by stating “I understand…I will do my best – I explained to where I got caught with this deal. I trusted you, you can trust me..”.

The defendant failed to repay the loan by January 2019, and the plaintiff emailed the defendant again regarding repayment. The defendant responded by stating that the plaintiff “left everything undone with me, broke all the commitments we agreed upon. Knowing all the facts you are ignoring as if it’s a game and you wanna play your way. Pls finish this either way – we are not done yet…”

However, the plaintiff told the defendant that he had mixed up their two business dealings, which were the sale of the initial townhouse project properties, and the personal loan. The plaintiff also denied breaking any of his commitments to the defendant. The defendant still had not repaid the loan by the time of trial.

Should the defendant be made to repay the loan?

The plaintiff sought to collect the loan principal of $100,000 plus interest from the defendant at the same rate as his line of credit. The defendant admitted that he borrowed the money from the plaintiff, but argued that the parties had an agreement that the loan would be repaid once they sold the remaining three properties. He contested that the loan was not yet repayable since the land had not yet been sold. Further, the defendant filed a counterclaim seeking $2 million from the plaintiff in order to compensate him for lost profits, interest, costs and other expenses caused by the delay of the sale of the properties.

Despite this alleged agreement, the Court found that there was no evidence to suggest that repayment of the loan was conditional upon the sale of the other properties. Further, the defendant failed to establish that the Plaintiff had breached a partnership agreement or that the plaintiff has been unjustly enriched. Instead, the Court concluded that the loan was initially payable after three months. Consequently, the Court ordered the defendant to repay the principal amount of the loan, being $100,000, and dismissed his counterclaim against the plaintiff.

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