REAL ESTATE LITIGATION: PARTIES’ FAILURE TO CLOSE TRANSACTION

According to our civil litigation lawyer, buying and selling property in both commercial and residential settings can be a very exciting time. In an ideal world, the purchase and sale process will go smoothly and the parties will face little to no obstacles. However, external factors can sometimes complicate the process, especially when one party, either the seller or the buyer, fails to honour their commitment. In these situations, the innocent party might start to wonder what they are entitled to regarding damages due to the breach of contract. The answer to this question is dependent on which party reneged on the agreement and whether the other party had a duty to mitigate given the circumstances.

The Buyer Reneging on the Deal

In most real estate transactions, the buyer will put forward an offer, which the seller may accept. The offer typically contains a purchase price and closing date pursuant to the Statute of Frauds, R.S.O. 1990. Once an offer has been accepted, typically the purchaser will pay a deposit before the closing date. However, there are times when the buyer may face setbacks and decide to renege on the deal, for example by not paying the deposit or purchase price in full. This could occur for a variety of reasons including job loss, trouble obtaining a mortgage, and other unexpected costs.

You might be wondering, can a buyer renege on a real estate deal? What happens to their deposit if they no longer wish to proceed with the real estate transaction?

In general, when a buyer reneges on a deal, they are typically obligated to pay damages as a consequence of the breach of contract. In these situations, oftentimes the buyer is unable to get their deposit back from the seller. The general rule is that the buyer is responsible for paying to the seller all the costs the seller endured after the buyer reneged on the deal. These costs can include the cost to re-stage the property for an open house, legal fees, and most importantly, the difference in the new selling price if the seller ends up selling the property for less than what the buyer agreed to pay for it. For example, if the buyer and seller agreed to a purchase price of $1,000,000 and after the buyer reneged on the deal, and if the seller sold the property for $950,000, the initial buyer may have to pay the $50,000 difference in damages to the seller in addition to any other related costs mentioned above.

If the reneging buyer decides to put forward a new offer that was less than the initial agreed-upon selling price, the seller is not obliged to accept the new offer as a duty to mitigate.

The Seller Reneging on the Deal

There are also situations where, after a seller agrees to a purchase price with a buyer, the seller may find similar homes selling for more than what they agreed to. The seller may decide to renege on the deal and try to sell their property to someone else for more money. This situation is becoming more commonplace in today’s market as housing prices continue to appreciate.

However, the seller is unable to renege without paying damages to the purchaser, similarly to if the buyer were to renege on the deal. For example, if a buyer and seller agree to a purchase price of $1,000,000 and the seller reneges and decides to sell the property to someone else for $1,200,000, they would likely be responsible for paying the $200,000 difference to the buyer as damages. The buyer would additionally be eligible to take back their initial deposit. The buyer has a duty to mitigate the amount of damages suffered due to the breach.

Instances where Parties can Renege

In certain cases, it is permissible for a party to withdraw from the sale of a property if both parties agreed to an “escape clause” in the contract. An escape clause allows the seller to terminate the agreement under certain conditions. While this clause may seem as though it solely benefits the seller, it actually benefits both the purchaser and the seller. For example, there may be a situation where the purchaser and seller agree to a purchase price, but the purchaser is uncertain whether they will have the necessary funds available to purchase the property until they finish a certain project in four months. Because this time period burdens the seller by delaying the transaction, the seller is permitted to continue marketing their property to other potential buyers while the initial purchaser awaits the availability of funds. If the seller decides to sell their property to another party, the initial buyer is given their deposit back and no damages are paid as a result since there was technically no breach due to the presence of the clause. In this type of arrangement, the buyer benefits from being aware the property may be sold to another purchaser, and the seller benefits from being able to continue marketing their property with the potential of a different sale.

Alternatives to Going to Court

It is in the best interest of both parties in every transaction to successfully close the deal. The cost of going to court over a failure to close a transaction can be a very expensive and time-consuming process. One way to avoid going to court is by extending the closing date. Extending the closing date gives the buyer time to obtain the necessary funds to close the deal. It also allows the seller time to request additional money from the buyer for the deposit where necessary. Another alternative to going to court involves the seller giving the buyer a vendor take-back mortgage. A “Vendor Take-Back” mortgage occurs when the seller of a property extends a loan to the buyer to secure the sale of the property. It is generally a mortgage contract that the purchaser has with the seller directly, as opposed to with a bank.

As you can see, the excitement and joy that comes from the purchase and sale of a property can be disrupted by the failure to close the transaction by either the purchaser or seller.

If you have a real estate dispute or you want to know your rights regarding a real estate transaction, feel free to call our law firm at 416-583-2377 or, alternatively, e-mail us at admin@chandlitigation.com to schedule a consultation.

*DISCLAIMER: The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this website are for general informational purposes only.  Information on this website may not constitute the most up-to-date legal or other information.*