Remedies Available to Buyers in Failed Residential Real Estate Transactions

Prepared for a Panel of the OBA Professional Development – Real Property Law Section May 6, 2024

By Ashley Hizo and Slonee Malhotra

A Seller in Breach

While in a perfect world, both the seller and the buyer would strictly adhere to a firm Agreement of Purchase and Sale (APS), given market conditions of late, buyer-side lawyers are increasingly approached for advice about situations where a seller repudiates an APS and a deal falls through.
Most real estate transactions include a “time is of the essence clause” to reference a closing date at section 20 of the standard Ontario Real Estate Association APS:

“Time shall in all aspects be of the essence hereof provided that the time for doing or completing of any matter provided for herein may be extended or abridged by an agreement in writing signed by Seller and Buyer or by their respective lawyers who may be specifically authorized in that regard.”

Parties may negotiate an extension of a closing date, however, the essential obligation remains to be the confirmation of timely performance.
If a party does not close on a real estate transaction on the agreed closing date, that breaching party faces a range of consequences that may include an award of specific performance or damages. A seller may breach the APS if they cannot satisfy material obligations under the agreement, for example if they are unable to provide clear title or vacant possession of the property on closing. Or, a seller might refuse to close the transaction where they have changed their mind about the bargain they made and want to re-sell to a third party for a higher price.
The following are examples of Ontario cases in which the Court has provided guidance in the event of a breaching seller:

• A seller unilaterally changed the lot dimensions from those set out in the draft plan of subdivision that was attached to the APS and ignored repeated complaints from the buyer was found to have breached the APS.¹
• A seller was found in breach of the APS when the seller refused to close unless the buyer agreed to add new conditions to the APS.²
• A seller was found in breach of the APS when the seller acted unreasonably by refusing to close due to a minor delay in the delivery of closing funds, outside of the buyer’s control.³
• A seller was found in breach of the APS where they were not in a position to close because they did not have a signed resolution authorizing the share transfer that was necessary to carry out the closing.⁴
• A seller was found in breach of the APS when he had signed the APS on his wife’s behalf, and later on, no longer wished to sell the property to the purchaser.⁵

Repudiation of the APS

Repudiation of an APS occurs when one party acts in such a manner as to permit the other party to conclude that the first party no longer intends to honour the APS.
Repudiation can occur, for example, in the context of a pre-construction agreement if the seller failed to meet an obligation under the APS. Not every breach of the terms of the APS however, will automatically amount to repudiation. To constitute repudiation, the term in breach must be one of sufficient importance to the APS such that there is a substantial failure of performance.⁶
Repudiatory conduct may occur in the form of an anticipatory breach, being a breach where one party makes it clear through their words or conduct that they will not perform their obligations under a contract before the performance date.⁷

Remedies Available to the Innocent Party in the Face of a Seller’s Repudiation

Repudiation alone does not terminate an APS. When a seller repudiates, the innocent buyer is left with two choices:

1. Accept the breach and terminate the APS: The buyer may take the position that the breach of the APS relieves them of any further obligation under the contract. If the buyer elects this route, they have no further obligation under the APS and there is no need to tender (i.e., continue to be ready, willing and able to close). In accepting the repudiation, a buyer may retain the right to sue the seller for damages resulting from the breached APS. In this situation, a buyer cannot bring a claim for specific performance.
2. Affirm the contract and ensure you’re ready for closing: The buyer who wishes to continue to uphold the APS as binding must clearly communicate their intention to the seller and at all times act consistently with that position. In this case, the buyer elects to sue for specific performance and/or damages in lieu thereof.

When faced with repudiatory conduct, an innocent party must be very cautious to clearly state their intention and position going forward. Where a buyer acts inconsistently with their stated position, they can waive their right to certain remedies.
In practice, lawyers representing buyers may advise their clients to avail themselves of the following additional options:

1. Negotiate an abatement in the purchase price: Say, for example, the seller is in breach because they promised vacant possession in the offer but the tenant is refusing to leave the property. It might be worthwhile for the buyer to assume the tenant if the purchase price is reduced by the equivilant of the tenant’s rent payments for a duration of time (maybe a few years);
2. Mutual release: The cost of litigation is expensive and stressful. An award of damages may be negligible when all is said and done. Perhaps the parties are in a better position to cut their losses and walk away following the breach. In this circumstance, negotiate for the buyer’s deposit + interest (if any) to be returned.

An Overview of Specific Performance and Damages

Specific Performance:

Specific performance is an equitable remedy whereby the Court orders a party to fulfill its contractual obligation. The Court will typically only grant an order for specific performance if the innocent buyer can show that the subject property is uniquely situated to his or her needs such that an alternative substitute property is not readily available, and therefore an award of damages will not be sufficient to compensate the buyer for the seller's breach.⁸
To obtain specific performance, the non-breaching party must show that on the date set for closing, they were ready, willing, and able to fulfill their obligations under the contract. This must continue not only beyond the original closing date but up until the conclusion of the trial for a decision on specific performance.
The Ontario Court of Appeal has provided recent guidance on the relevant three-prong test necessary to establish a successful specific performance claim:

1. The nature of the property involved;
2. The related question of the adequacy of damages; and
3. The behaviour of the parties, having regard to the equitable nature of the remedy.⁹

In assessing the nature of the property involved, the Court will look to the subjective uniqueness of the property from the point of view of the buyer at the time of contracting and ask whether a substitute is readily available. A non-exhaustive list of factors a Court may have regard to in assessing the uniqueness of a property include: the physical attributes of a property, the buyer’s subjective interests, and the circumstances of the underlying transaction.¹⁰ However, despite evidence of a property having a number of
attractive and hard to replicate qualities (i.e. evidence of uniqueness in support of specific performance), the Courts have been found to be reluctant to award specific performance for property purchased solely as an investment property, given that monetary damages would be well suited to satisfy purely financial interests.¹¹
In assessing the related question of the adequacy of damages, in conjunction with the first prong of the test, the Court will assess whether the buyer has demonstrated that granting the buyer the right to the property, rather than its monetary equivalent, serves the interests of justice. Additionally, if damages are found to be particularly time-consuming, difficult, or complex to compute, this may militate in favour of a Court’s decision to award specific performance.¹² For example, the Court found that specific performance is more appropriate in the context of a commercial contract that may depend on the occurrence of future events.¹³
Finally, in assessing the behavior of the parties and having regard to the equitable nature of the remedy of specific performance, the Court will look to any evidence of any bad faith.¹⁴ For example, the Court found that a seller’s actions in trying to terminate a valid APS in order to take advantage of the escalation in property value constituted bad faith and ordered specific performance as a result.¹⁵
Note that a party who sues for specific performance can also sue for damages in lieu of specific performance. In this circumstance, the damages will be assessed at the date of trial.

Damages:

The innocent buyer may choose to accept repudiation as relief from having further obligations under the APS and consequently sue for damages of the breach. As the innocent party, the buyer should also seek the return of any deposit put towards the property as well as any damages for costs associated with the failed sale transaction.
Commonly sought damages may include:

1. Did the buyer sell their home and is now on the hook for paying a second mortgage? Bridge financing?
2. Is there a need for the buyer to arrange a rental property while resuming a search for another property?
3. Are there any costs related to cancelling the movers?
4. Are there non-refundable commitment fees associated with an insitutitional or private lender?
5. Does the buyer have to cancel any contracts for renovations that were lined up?

In some situations, it may also be possible to recover damages for the difference between the purchase price in the APS and a higher price that was paid by another buyer after the APS was terminated. ¹⁶ The presumptive measure of calculating damages in the context of failed real estate transactions is generally the difference between the contract price and the market value of the land on the ‘assessment date’ or date of breach, usually the closing date.¹⁷ In cases of a claim for specific performance and damages in lieu, the assessment date is the date of trial so any increase in the value of the property would be captured here¹⁸.
Despite the presumptive measure of damages, there are circumstances where a court may award damages for a buyer’s claim for lost profits. For example, in one case ONCA awarded damages for a buyer’s lost profits on the basis that the wording of the APS and the buyers’ actions showed that it was always their intention to purchase the land for development.

Certificates of Pending Litigation

In the event that a buyer is suing for specific performance, in many cases it is advisable to register a certificate of pending litigation (CPL) against the property in issue. The purpose of a CPL is to warn any party interested in a property that there is an outstanding claim against the property in question.
Once a CPL is registered, it acts as a notice to the public indicating that the property in issue is subject to a litigation dispute. A CPL will ensure that the seller is not able to transfer the property pending the resolution of the buyer’s initiated specific performance claim.
The process of obtaining and registering a CPL is governed by Section 103 of the Courts of Justice Act and Rule 42 of the Rules of Civil Procedure. The plaintiff (i.e. the innocent buyer) must include a claim for the CPL in the Statement of Claim, along with a description of the land at issue. Once the Claim is issued by the Court, the buyer can then immediately file a motion to obtain the CPL. A CPL motion can be made on or without notice. In cases of urgency, a party may bring a motion for a CPL before issuing its Statement of Claim pursuant to Rule 37.17 of the Rules of Civil Procedure. If a party relies on this rule it must undertake to commence an action forthwith.
On the hearing of a motion for CPL, the Court must determine whether the plaintiff has a triable interest in the land. This is a low threshold, as the requirement is that there is a triable issue as to such interest. A plaintiff is not required to prove that they will likely succeed at this stage. The CPL is a discretionary equitable remedy. The Court will look at all relevant matters between the parties in determining whether a CPL should be granted.¹⁹
If the threshold test has been met, the Court may consider the following non-exhaustive list of factors²⁰ in determining whether it should exercise its discretion to grant the CPL:

(a) Whether the plaintiff is a shell corporation;
(b) Whether the land is unique;
(c) The intent of the parties in acquiring the land;
(d) Whether there is an alternative claim for damages;
(e) The ease or difficulty in calculating damages;
(f) Whether damages would be a satisfactory remedy;
(g) The presence or absence of a willing purchaser;
(h) The harm to each party if the CPL is or is not removed with or without security;
(i) Whether the interests of the party seeking the CPL can be adequately protected by another form of security; and
(j) Whether the moving party has prosecuted the proceeding with reasonable diligence.

Once a CPL order is issued, it can be registered on title. Consequentially, any parcel register search of the property at issue will show the existence of the CPL. It may then only be removed on a motion to the Court. The test that the Court will use in a motion to discharge a CPL is the same test used as granting the CPL.

Treatment Of the Deposit Monies

If a buyer accepts the repudiation of the APS and commences an action for damages, the buyer should also seek the return of its deposit as part of the relief in that action. If a buyer fails to do so within a reasonable time, they may remain bound to complete the transaction regardless of the seller’s breach.
However, if a buyer elects to treat the APS as binding and seeks specific performance, the buyer should not demand a return of the deposit and should make clear their intention to uphold the APS and must remain ready, willing, and able to close the transaction, up to the time of judgment in the action.
The distinction for the treatment of deposit monies in a repudiated APS is best illustrated in the following case:
In Ching v Pier 27 Toronto Inc., 2021 ONCA 551, the buyers entered into a pre-construction APS and paid a deposit. The APS provided that time was of the essence. The original completion date of 2010 was extended several times for various reasons, none of which were permitted under the APS. However, the buyers never complained.
In 2013, the buyers’ intended lender cancelled their mortgage approval and the buyers were unable to assign the APS to another buyer. Due to the unpermitted extensions of the completion date, the buyers asked to have the APS rescinded. The sellers’ lawyer asserted that the buyers did not have the right to terminate the APS. On the final scheduled completion date, the buyers had insufficient funds and the transaction ultimately did not close.
Despite finding that the seller has breached the APS by extending the occupancy date beyond what the APS allowed, the trial judge held that buyers were not entitled to a return of their deposit. Once the seller had breached the APS, the buyers should have opted to sue for damages instead of pressing for performance and bringing the action only when the promised performance failed to materialize.²¹
The Ontario Court of Appeal confirmed that the seller was entitled to retain the deposit. To maintain its right under the APS, an innocent buyer must raise its repudiation either expressly or by conduct rather than by treating the contract as if it is still in full force and effect.

Relief from Forfeiture

Relief from forfeiture is an equitable and discretionary remedy. It allows the Court to excuse a party from the application of penalties as a result of such party’s breach or failure to perform.
The Ontario Court of Appeal has stated that the test for determining whether relief from forfeiture should be granted is whether the party seeking relief from forfeiture can show that (i) the forfeited sum was out of proportion to the damages suffered by the other party upon breach, and (ii) that it would be unconscionable for the other party to retain the money²².
In clarification, the Ontario Court of Appeal has also indicated that the finding of unconscionability must be an exceptional one and provides the following non-exhaustive indicia of unconscionability: inequality of bargaining power, a substantially unfair bargain, the relative sophistication of the parties, the existence of bona fide negotiations, the nature of the relationship between the parties, the gravity of the breach, and the conduct of the parties.²³
In the Ching case mentioned in an earlier section, the Ontario Court of Appeal upheld that the buyers were not entitled to the return of their deposit, despite the sellers having breached the APS. However, it is important to remember that relief from forfeiture is discretionary and is decided on a case-by-case basis. It follows that, if a seller acts in an unconscionable manner, a buyer may still get their deposit back if the Court believes that the facts warrant a return of the deposit.

How to Avoid Closing Day Problems: Practical Recommendations from a Real Estate Lawyer

Here are some tips:

1. Establish and maintain a closing checklist²⁴
   a. Go through a closing checklist carefully and make note of what has been given to the seller’s lawyer (or received) and note deficiencies in any documents at the time and in all cases, at least a few days before closing.
   b. Identify to the other side what was asked for and not delivered prior to the closing date.
2. Be very careful about what you write to opposing counsel
   a. Be mindful of the effect of declaring an anticipatory breach because if it is not an anticipatory breach situation, you may have put your own client in breach through making your erroneous declaration.
   b. Be careful of insisting on strict compliance with the agreement because if you are insisting on it, then you may be required in turn to strictly comply
3. Complete an analysis to determine whether there is a case for specific performance
   a. Assess with the purchaser and having regard to property’s characteristics. Note: many builders are now building the same home on a multitude of lots. Is there any inherent uniqueness in this situation? Likely not.
4. Refer to contingencies in the APS
   a. The APS typically includes contingencies for occurrences related to reasonable delays. Review the details in the APS to see what the allowable time is for a delay on the party of the seller. Usually a 30-day window is applicable. However, if the house closing delayed by the seller moves beyond the allowable window, the seller could be liable for financial losses incurred by the buyer due to a delay,
5. Have a sense of trouble coming
   a. Some indicators that may suggest an anticipatory breach: the overly technical requisition letter, the last-minute requests for unreasonable things: cleaning debris, rumors of environmental hazards and environmental clearances, corporate minutes, declarations, etc.. Diarize these events as they occur.
6. Communicate with your client when you sense trouble is coming and keep detailed records of these calls and conversations.

¹ Pompeani v. Bonik Inc. 1997 CarswellOnt 3744, [1997] O.J. No. 4174, 104 O.A.C. 149, 13 R.P.R. (3d) 1, 35 O.R. (3d) 417, 74 A.C.W.S. (3d) 887 at para 35.
² Kirshenblatt v. Kriss, 2012 ONSC 6568 at para 24.
³ More v. 1362279 Ontario Ltd. (Seiko Homes), 2023 ONCA 527 at para 26.
⁴ 801Assets Inc. v 605446 Ontario Limited, 2016 ONSC 2772 at para 81.
⁵ Ryan in Trust v. Kaukab, 2011 ONSC 6826 at para 186.
⁶ Potter v New Brunswick Legal Aid Services Commission, 2015 SCC 10 at para 144.
⁷ Ibid at para 149.
⁸ Semelhago v. Parmadevan, 1996 CanLII 209 SCC
⁹ Lucas v 1858793 Ontario Inc (Howard Park), 2021 ONCA 52 at para 71.
¹⁰ Ibid at para 73.
¹¹ Southcott Estates Inc. v. Toronto Catholic District School Board, 2012 SCC 51 at paras 40-41.
¹² Supra note 8 at para 79.
¹³ Neighbourhoods of Cornell Inc. v. 1440106 Ontario Inc. (2003), 11 R.P.R. (4th) 294, at paras. 112-14, aff’d (2004), 22 R.P.R. (4th) 176 (C.A.), leave to appeal refused, [2004] S.C.C.A. No. 390.
¹⁴ Supra note 8 at para 80.
¹⁵ Gracegreen Real Estate Development Ltd., 2017 ONSC 6369 at para 170.
¹⁶ Lawrie v Gentry Developments Inc, [1989] OJ No 3230, 72 OR (2d) 512, 10 RPR (2d) 242, 20 ACWS (3d) 441 at para 38.
¹⁷ The Rosseau Group Inc v 2528061 Ontario Inc, 2023 ONCA 814 at para 62.
¹⁸ Preiano v. Cirillo, 2024 ONCA 206 at para 10.
¹⁹ Perruzza v. Spatone, 2010 ONSC 841, para 20.
²⁰ Pacione v. Pacione, 2019 ONSC 813 at para 20; 2254069 Ontario Inc. v. Kim, 2017 ONSC 5003 (CanLII), at para 21.
²¹ Ching v. Pier 27 Toronto Inc., 2021 ONCA 551 (CanLII) para 26.
²² Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA 282, 413 D.L.R. (4th) 272, at paras. 10 and 15, citing Varajao v. Azish, 2015 ONCA 218, at para. 11
²³ Ibid at para 25.
²⁴ Sidney Troister, The Reality of Tendering: How Important is Tendering on Closing in the Decisions You Tender?, 2018 24th East Region Solicitors Conference 22A, 2018 CanLIIDocs 10894, <https://canlii.ca/t/sqz1>, retrieved on 2024-04-29.