A rapidly changing and volatile real-estate market makes it more likely that deals will be cancelled, with painful consequences such as lost deposits. The buyer who does not carry through on his obligations almost always loses his deposit, and may be forced to pay additional damages to the seller.
Some buyers were overenthusiastic and regret having bid high at the top of the market. In other cases, a buyer may not have arranged all the financing that was needed. You may get into trouble if you need to sell your present property to move up to another one. The buyer of your house may fail to carry through, leaving you with insufficient funds to close the deal on the house that you had agreed to purchase.
The standard agreement of purchase and sale provided by the Ontario Real Estate Association does not provide a buyer with a warning that the deposit will be forfeited if he fails to close the deal.
One might think that in some situations it would be unfair for the seller to keep the deposit. Suppose that the seller can quickly resell the property at an even higher price to somebody else, leaving the seller better off due to the first deal having been broken off by the buyer. Despite that, the seller still keeps the deposit.
The common law on real-estate deposits received a thorough review a few years ago in a series of cases in British Columbia that I wrote about previously. The same principle has been accepted by the Ontario Court of Appeal.
The consequences become even worse in a falling real-estate market if the vendor can prove that it has suffered damages.
The buyer will lose his deposit even if he wants to complete the purchase, but has fallen into a technical violation of the agreement. This was illustrated in the recent Ontario court decision in Xu v 2412367 Ontario Limited, where Friedman Law associate Judy Hamilton acted for the vendor. The buyer ran into difficulty, because he was counting on getting money from the sale of another property, which was delayed. The deadline came and passed, and the vendor notified the buyer that it considered the deal to be cancelled. The buyer wanted to borrow money to close the deal later, but the court held that there was no obligation on the vendor to accept a late payment.
The contract stated, as do most real-estate purchase agreements, that "time shall be of the essence." That principle had previously been accepted by the Ontario Court of Appeal in 1473587 Ontario Inc v Jackson. In that case, the Loblaw supermarket company had wanted to buy a piece of land for a new store, and through inadvertence was a few days late in delivering its cheque. The vendor had found a buyer who was willing to pay more, and was entitled to refuse to accept the late delivery of Loblaw's cheque.
A buyer who is relying on getting funds from the sale of another property should consider arranging bridge financing as a back-up just in case something goes wrong. The "time shall be of the essence" term is found in the standard Ontario Real Estate Association form. A buyer who has some bargaining power may be well advised to cross out that term.
Paying damages on top of the lost deposit
The consequences become even worse in a falling real-estate market if the vendor can prove that it has suffered damages that exceed the amount of the deposit. The vendor may sell the property at a lower price, and the buyer who failed to carry through is responsible for the seller's loss.
It is possible to draft a contract to state that the deposit itself is the limit of damages, but that is not in the standard form contract. In the absence of that, the seller can sue for its actual damages. This was highlighted in a recent British Columbia case, Albrechtsen v Panaich, where the sale occurred after prices dropped due to the introduction of the 15 per cent foreign buyer's tax. There, the original agreement had been to purchase a house for $1,260,000, and the seller ultimately sold it for $910,000. Including expenses, the court held that the defendant was required to compensate the seller for total damages of $360,000.
A few years earlier, in Gulston v Aldred, an even larger damages award of $600,000 was made in favour of the jilted seller of a $1.6-million house.
In these situations, the person selling the property does have to demonstrate that it mitigated its losses. She has to show that she took prudent measures in marketing it to get a reasonable price under the current market conditions. Otherwise, the seller can be accused of making an improvident sale and will not be compensated for all her claimed damages.
Risks exist, but with prudent planning they can be minimized.
What if the seller is the one that breaks the deal?
Sometimes it is the seller that has second thoughts and wants to break the deal. Empty nesters might decide to sell their house, and then have regrets because they are too attached to it. They refuse to turn over the keys when the buyer's cheque arrives. In other cases, there may be a more mercenary motive, where the seller feels that he accepted too low a bid and could have gotten more.
Buyers are entitled to sue a seller for damages when the seller backs out. While a buyer can in principle get compensation, she is still in a less advantageous position than a seller. The seller has, of course, paid no deposit. The buyer must go to court and prove she has suffered damages of a specified amount, unlike the seller who can keep the deposit without needing to prove that he suffered any damages at all.
Risks exist, but with prudent planning they can be minimized. It is very important for the potential buyer to get good advice and think carefully before signing on the dotted line.
Peter Spiro is a lawyer practicing civil litigation with Friedmans Law. The legal information in this article is of a general nature, and should not be considered legal advice to the reader.
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