Legal Remedies Available to Sellers in Failed or Aborted Residential Real Estate Transactions

By Slonee Malhotra

“When the residential real estate market is a rising market, most people - perhaps with the exception of first time buyers, are happy homeowners and investors. When the market turns and drops, it is not for the faint of heart.” - Justice M.L. Edwards[1]

A Buyer in Breach

An Agreement of Purchase and Sale (APS) is the backbone of the residential real estate transaction in Ontario. The APS is intended to bring certainty and finality during the buying and selling process. Yet, due to recent declining market and stricter mortgage rules, the buying and selling process is becoming more complicated in Ontario.

When a buyer falls short, whether by missing deposit payments, failing to secure financing prior to closing, or refusing to close on the closing date, the seller may:

• Terminate the APS;
• Retain the deposit; and
• Recover damages for resale losses and carrying costs.

When a buyer defaults, the financial impact on the seller can be significant. Impact can range from lost opportunity in the case of an original competing offer period to additional carrying costs of holding the mortgage for a longer duration (and possibly a higher interest rate in an open mortgage if the mortgage has approached maturity) or increased costs of the seller holding multiple mortgages in the case where the seller has closed on a subsequent purchase. In this case, there will likely also be a bridge loan that needs to be paid back. Fortunately, Ontario courts have recognized a range of remedies available to sellers.

This article highlights the most common types of buyer breaches, the remedies available to sellers, and key Ontario case law that illustrates the Courts’ approach.

This article is related to a previously written article on the topic of Seller’s Breach and the Remedies Available to Buyers.

Common Breach #1: Failing to Deliver or Pay the Deposit on Time

One of the earliest obligations under an APS is the timely delivery of the deposit monies. A failure to provide the deposit on time, given that “time is of the essence”, constitutes a fundamental breach. Where such breach exists, the seller is entitled to terminate the APS, can refuse to extend the deadline for the receipt of deposit funds, and the seller can keep any portion of the deposit which has already been paid.

In Xu v 2412367 Ontario Ltd, the buyer agreed to buy a $44M property with an 8% deposit payable in installments. The buyer failed to pay the final $2.5M installment on time and sought an extension.[2] The seller refused, terminated the APS, and kept the $1 million already paid. The Superior Court held that the APS was validly terminated, and the seller was entitled to keep the $1M deposit already paid.[3]  

Common Breach #2: Failing to Obtain Financing

Buyers who fail to secure financing are in breach of the APS.

Where the buyer fails to secure financing and notifies the seller prior to the closing date, not only is the seller able to terminate the transaction by declaring an “anticipatory breach”, but the seller can also retain the deposit and pursue damages plus carrying costs.

The measure of damages in a failed real estate transaction is the difference between the original purchase price and the fair market value at the time of breach. The deposit is automatically forfeited to the seller in the case of breach and it’s up to the buyer to bring an application for relief of forfeiture to recover the deposit where the seller is unjustly enriched by retaining the deposit

In Azzarello v Shawqi, the buyer was unsuccessful in securing financing for a $1.55M purchase. The Seller was forced to resell the property at $1.28M, resulting in a $275,000 loss.[4] The Court of Appeal confirmed damages were payable but held that the $75,000 deposit must be credited against the loss to avoid double recovery, ensuring the seller was fully compensated for the shortfall without receiving more than their actual loss. ^[5] The buyer also sought relief from forfeiture of the deposit, but the Court rejected the claim because the $75,000 deposit was proportionate to the $1.55M purchase price and there was no evidence of unfairness or unconscionability in the transaction. [6]

In Redstone Enterprises Ltd. v. Simple Technology Inc, the buyer entered into an APS to buy a Brantford warehouse for over $10 million and paid deposits totaling $750,000, however ultimately failed to secure financing and repudiated the agreement prior to the closing date. The seller resold the property and suffered no actual loss. Despite this, the Court of Appeal confirmed that when a buyer rejects an APS and fails to close, the seller is entitled to retain the deposit as a matter of law, even if no damages are proven. The Court emphasized that a deposit is automatically forfeited upon default unless the buyer can obtain relief from forfeiture, which will only be granted in exceptional circumstances where the forfeiture is unconscionable.[7]

In Gamoff v Hu, the buyers paid an initial deposit but failed to deliver a further supplementary deposit installment. Shortly after this, the buyers admitted they would not be able to close due to insufficient financing. The sellers accepted the buyer’s anticipatory breach and terminated the agreement before the closing date. The seller relisted the property for the original price and ultimately had to drop the list price several times before securing an offer several months later at a $470,000 loss.[8] The Court awarded the seller compensation for the amount of the shortfall and carrying costs.[9]

Common Breach #3: Missing the Closing Date

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. Missing the closing date or failing to complete closing on the agreed closing date constitutes a breach of the APS. In such cases, sellers may terminate the APS, retain the deposit, and sue for damages calculated by the resale shortfall.

In Beatty v Wei, the buyer refused to close on closing date, citing concerns about prior grow-op use. Buyers are expected to conduct their own due diligence and the governing principle is “buyer beware”. As a result of the buyer’s breach, the seller resold the property for $86,100 less.[10] The seller was entitled to keep the $30,000 deposit made by the buyer and was awarded $61,429 in damages.[11]

Similar to Gamoff, in Prowse v. Noroozi, the buyers failed to close on an APS for a residential property. The vendor resold at a lower price and claimed damages. The Court awarded the seller the shortfall of funds upon resale plus the seller’s carrying costs.[12]

How to Avoid Becoming a Buyer in Breach: Practical Recommendations from a Real Estate Lawyer

1. Confirm deposit arrangements early!

   
   Ensure the APS clearly sets out the timing and method of payment. Confirm delivery of the deposit to the lawyer’s trust account. Follow up if the deposit funds are delayed and ask the buyer to confirm their ability to close.

2. Keep track of communications.

   
   Keep written records of all extension requests, financing updates, and communications with the seller or their lawyer.

3. Be very careful about what you write to opposing counsel.

   Be mindful of the effect of declaring an anticipatory breach because if it is not an anticipatory breach situation, you may have put the buyer in breach through making your erroneous declaration.

4. Have a sense of trouble coming.

   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.

5. Maintain clear communication with all parties.

Provide timely updates on financing issues, inspection concerns, or other potential delays to avoid being in breach.

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Slonee Malhotra is a Partner at SorbaraLAW, practicing out of our Waterloo office, focusing primarily on Real Estate and Condominium Development. Contact Slonee today for more information about buyer or seller breach.