Having worked in real estate’s legal field, I have firsthand experience of the consequences for buyers and sellers who back out of their Agreements of Purchase and Sale. In my current role as a senior mortgage agent, I have also had to help many purchasers put in place emergency mortgage financing to ensure they are not held liable for any damages related to their inability to close or to save them from forfeiture of their deposits by new home builders.
Despite the legal precedents set by the superior courts, many purchasers and sellers still don’t fully understand or appreciate how failure to uphold their end of the bargain can cost them a lot of money along with a never-ending legal headache.
One of the ways purchasers and sellers can protect themselves from being financially exempt from damage claims is by ensuring there are specific conditional periods written in their offers. The most common conditions include conditional financing periods, inspection conditions and enough time for a lawyer to review the Status Certificate if the property happens to be a condominium. For sellers, there could be conditions written up related to finding a new home within a specific time frame, for example. This condition can offer protection against being out of a place to live or an upward swing of the market where prices become too high.
Ultimately, contingencies offer more time for purchasers and sellers to solidify their offer without losing their deposit or being sued for damages if they happen to change their minds or can't fulfill conditions.
From experience, most purchasers believe walking away from a contract after all conditions get met and when the offer is ‘firm,’ will only mean losing their deposit. After working with many lawyers and even going through a court battle myself, I can tell you that the deposit is only the beginning of a potential damage claim that may arise.
In 2017, I sold my house in Newmarket, Ontario, during what was considered an unprecedented market. Homes were flying off the shelves so to speak due to limited inventory and an influx of foreign investment. Like most property owners who were selling at the time, I believed it was the perfect opportunity to capitalize, so I listed my home for sale.
Within one day of my house being on the market, I received offer of $200,000 over the asking price. Without hesitation, I accepted. The purchaser did not require an inspection or financing condition. And besides people willingly paying crazy amounts of money for real estate at the time, conditions were frowned on and usually denied so none were put forth.
Before closing, due to a sudden downturn in the market because of the influence of the Government's Mortgage Stress-Test and the foreign investment tax, my purchaser did not want to close for the agreed price. Instead, he requested a $250,000 price reduction, which I denied.
Many sellers erroneously believe that if a purchaser walks away from their contract to buy, they will automatically be entitled to the release of the deposit. The legal system, unfortunately, does not allow this if the purchaser refutes the release of the deposit.
The purchaser must authorize the brokerage to release it, and if they won't, the seller will have no choice but to sue them in court. A realty brokerage is not obligated to release the deposit just because the contract came to an end. They don't have the authority to govern the matter. Since many purchasers, even those who obviously breached their contracts, will not voluntarily release the deposit because it may otherwise incriminate them, bureaucracy ensues.
In my case, I had to sue the purchaser for the deposit as he refused to release it even though he overtly breached his contract by his failure to close. He later countersued me for the deposit back, which forced me to not only sue him for the difference in the market value of my property from the time he offered to purchase it to the date of my court hearing which was determined by an appraisal but sue him for the release of the deposit. I won both claims.
For sellers, it can be helpful to realize that purchasers can still sue if they have a change of heart. For example, if a seller decides to walk away from a firm offer, a purchaser can sue for damages related to price fluctuation, especially if prices go up after the offer acceptance date.
An example in the case-law of Azzarello v. Shawqi shows the purchasers entered into an agreement of purchase and sale for a home in Mississauga for $1.555 million and gave a deposit of $75,000.
After the sellers agreed to a few extension requests, the buyers offered to close for about $1.4 million, but the sellers declined. They later resold the property for $1.28 million.
In conclusion, purchasers and sellers should understand the importance of conditional periods and that damage claims can go beyond just the loss of deposit, especially if the property depreciates or appreciates after signing and firming up an offer.
Sarah A. Colucci, Author
Senior Mortgage Agent, Mortgage Edge, Broker 10680
By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929