Frozen shareholder dispute stalled a Kingston home purchase

The situation

Roughly 40,000 dollars: that was the deposit Megan and Senthil had already wired into a lawyer's trust account when the closing on their new home stopped moving. The purchase price sat in the high 600,000s, comfortable for a family with Senthil working as an IT support lead and Megan as a plumber, both employed steadily since landing permanent residency status the year before, with their daughter Tharshini settling into a Kingston school. The deposit represented most of what they had saved for the move, and it was sitting in a stranger's trust account with no closing date anyone could confirm.

The seller was not an individual. The property, a house that had been used as a rental, was owned by a small holding corporation with two shareholders who had jointly bought it years earlier as an investment. The listing agreement, the agreement of purchase and sale, and every document up to that point had been signed by one shareholder acting, apparently, on the corporation's behalf. Nothing about that was unusual on its face; corporations sell real estate in Ontario regularly, and a director or officer with proper authority can bind the corporation to a sale.

What Megan and Senthil did not know, because there was no reason they would, was that the two shareholders had stopped speaking to each other roughly a month before the property was listed, over a dispute about the corporation's other holdings that had nothing to do with this particular sale. The shareholder who signed the listing and the agreement of purchase and sale believed he had the authority to act alone. The other shareholder, once she learned the property was under agreement, disagreed, and instructed her own lawyer to put the sale on hold until the broader dispute between them was resolved.

Megan and Senthil had retained a lawyer for the closing at the outset, a sole practitioner working the file alongside a heavy caseload. As the closing date came and went with no clear explanation beyond a vague reference to 'an internal matter on the seller's side,' the family grew anxious enough to ask around, and were referred to our office roughly six weeks after the original closing date had already passed.

By the time the file reached us, the deposit had been sitting in trust for two months, the family was paying for a rented apartment they had expected to leave, and nobody had given them a clear answer about whether the corporation could actually complete the sale at all.

The gap nobody had noticed

The gap, once we pulled the corporate records, was simple to state and had been sitting unexamined since before the agreement was even signed: nobody had confirmed, at the outset, that the shareholder who signed had the authority to bind the corporation to the sale on his own. A corporation acts through its directors and officers, and internally, the specific individuals with authority to sign a binding agreement of purchase and sale depend on the corporation's own structure, its bylaws, and any shareholder agreement between the owners. A buyer dealing with the corporation in good faith, though, is not expected to audit those internal arrangements; someone the corporation has allowed to appear as the person in charge of selling a property will often be enough to bind it, regardless of what the bylaws actually required.

In a corporation with two roughly equal shareholders, it is common for a shareholder agreement to require both to consent to a sale of a major asset, particularly if the property was one of the corporation's only significant holdings. Whether that requirement existed here, and whether the signing shareholder had actually obtained the other's consent before signing, was exactly the question the prior lawyer had not resolved before advising the family to release their deposit into trust and proceed toward a firm agreement on the strength of one signature.

This was not a case of outright fraud. The signing shareholder appeared to genuinely believe, at the time, that he had authority to act, whether because of an informal understanding between the two of them or because he had simply assumed responsibility for the property's management over the years and never expected to need formal sign-off for a sale. But belief is not the same as authority, and once the second shareholder's lawyer raised the objection formally, what mattered was whether the corporation had held this shareholder out as someone with authority to sign, not simply whether he had, in fact, obtained the other owner's consent.

For Megan and Senthil, the practical risk was real, though not as one-sided as it first looked. A corporation cannot always escape a deal simply by pointing to an internal rule it broke; a buyer dealing in good faith is generally entitled to assume that someone held out as able to sign for the company had that authority, and the signing shareholder's years managing the property on his own meant the agreement was more likely to bind the corporation than not. The risk would have sharpened considerably if he had never been held out as a signing officer in the first place. Even so, while their deposit was protected in trust rather than paid directly to the seller, sitting through the uncertainty while that question got sorted out, after already giving notice on their rental and enrolling Tharshini in a local school, was a real cost even if no money was ultimately lost in the narrowest sense.

There was also a quieter risk in simply waiting. The longer the shareholders' dispute dragged on without a deadline attached to it, the more the family's own plans, the rental notice already given, the school year already begun, hardened into a position where walking away from the deal became harder, not easier, even if walking away might eventually have been the more sensible choice.

What we did

1. Requested the corporation's minute book and any shareholder agreement before advising on anything else. The prior file had no corporate records at all, so before assessing whether the sale could proceed, we needed to see the actual governance documents: articles of incorporation, any shareholder agreement, and resolutions authorizing the sale, rather than relying on assurances from either shareholder's lawyer about who had the right to sign.
2. Confirmed the deposit's status and protected it from any risk of release to either shareholder individually. We verified in writing with the trust-holding lawyer that the deposit remained in trust, undisbursed, and could not be released to either side without the family's consent or a court order, so that whatever happened in the shareholder dispute, the family's money was not exposed to it.
3. Opened direct communication with the lawyers for both shareholders separately, rather than letting the dispute filter through real estate agents or secondhand summaries. Because the two shareholders were not speaking to each other, we corresponded with each side's counsel independently, asking each to confirm in writing their position on whether the corporation had validly authorized the sale, so we had a documented, unambiguous record of where each side actually stood.
4. Set a firm deadline for the corporation to resolve its internal authority question. We wrote to both sides proposing a specific date by which the corporation needed to either confirm valid authority to proceed or formally advise that the agreement could not be completed, since an open-ended delay was costing our clients rent and uncertainty with no corresponding cost to the shareholders in dispute with each other.
5. Advised the family on their options if the deadline passed without resolution. We laid out plainly what would happen to the deposit and the agreement if the corporation could not resolve its internal dispute in time, including the process for having the deposit released back to them and their right to pursue the corporation for costs incurred in reliance on the agreement, so they were not left guessing while waiting.
6. Kept the family's rental and school arrangements in view throughout the delay, rather than treating the dispute as purely a legal question to be resolved on its own timeline. We periodically checked in on how the delay was affecting the family's practical situation, including their month-to-month rental costs and Tharshini's school enrollment, so any advice about pressing harder for a firm deadline or waiting a little longer accounted for the real cost the delay was imposing on them.
7. Followed up promptly once the second shareholder's lawyer confirmed a resolution had been reached between the two owners, rather than assuming a verbal update was enough to move the file forward. When the shareholders settled their broader dispute and the second shareholder formally consented to the sale in writing, we insisted on a proper corporate resolution authorizing the transaction before allowing the file to move back toward closing, so authority was documented rather than merely implied.
8. Reset the closing timeline and confirmed every condition was still satisfied under the original agreement's terms, rather than assuming nothing had changed after a ten-week delay. With authority now properly documented, we worked with the seller's lawyer to set a new closing date, confirmed the corporation's standing and any registered encumbrances on title were still in order, and proceeded to close on the terms originally agreed.

The outcome

The sale closed roughly ten weeks after the original closing date, once the corporation's shareholders resolved their dispute and the second shareholder consented in writing to the sale, with a proper corporate resolution backing the transaction. Megan and Senthil's deposit, which had sat protected in trust throughout, was applied to the purchase price exactly as originally agreed, at the original purchase price in the high 600,000s. No money was lost, and the terms of the deal itself did not change from what the family had signed up for months earlier.

The cost was time, not money: roughly two and a half extra months of rent on their apartment while the shareholder dispute worked itself out, an inconvenience the family had no way to plan around when they first signed the agreement. Because the file had been taken over mid-transaction, there was also a period of real uncertainty during which nobody, including us at the outset, could promise the family the sale would close at all rather than collapse and require them to start their search over from nothing.

The family's earlier lawyer had not done anything improper in the narrow sense, but had also never asked the corporation for its governance documents at the outset, a step that would have surfaced the authority question before the deposit was ever paid rather than two months into a stalled closing. Once the file was reviewed properly and the right questions were put to both sides directly, the underlying dispute turned out to be resolvable, and the family got the home they had agreed to buy, just later than planned.

Megan and Senthil moved in with Tharshini a little over two months behind their original schedule, having already settled her into a Kingston school during the wait on the strength of the rental they were still paying for. The clearest result of the delay, beyond the extra rent, was the anxiety of not knowing for several weeks whether a deal they had already committed most of their savings to would ever close at all.

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