Many buyers believe that if they change their minds about purchasing a home after a deal is already in motion they will simply lose their deposit. However, this is not always the case. While the deposit would indeed be forfeited, there are also more serious financial and legal implications to a failed real estate transaction, as evidenced by a recent Ontario decision.
The court ordered buyers who pulled out of a real estate deal to pay $470,000 to the sellers to make up the difference between what the house would have been sold for if the deal closed and the price they ultimately ended up selling their home for several months later.
The property in question was located in Stouffville, Ontario and was listed for sale on March 29, 2017 for $2 million. Within the first several days on the market there were 18 showings of the property, and three sets of buyers presented offers to purchase. The buyers in question submitted an initial offer of $2.05 million, but eventually increased their offer to $2.25 million, which was accepted.
The terms of the offer required the buyers to provide an initial deposit of $30,000, with a second deposit of $90,000 to be made on April 6, 2017. The closing date for the purchase of the property was August 30, 2017.
The buyers paid the initial deposit, but later contacted the listing agent and told him that they believed that they had paid too much for the property. After the deal was in motion, the buyers had learned that the combination of the assessed value of the home and their approved mortgage financing would not permit them to obtain the necessary financing to close the deal.
Notably the agreement of purchase and sale did not include a condition that would permit the buyers from extricating themselves from the agreement and the agreement was not contingent upon the buyers obtaining the necessary financing to close.
The buyers failed to pay the second required deposit, and the day after it should have been paid, went to the property and told the sellers in person that they did not have enough financing to go through with the deal.
The sellers relisted the property on May 1, 2017 with a new listed price of $2.25 million. They received no offers. Within about two weeks they relisted at the lower price of $1.99 million and again received no offers. By the end of July, the sellers decreased the price again to $1.78 million. They eventually sold the home for $1.7 million and the transactions closed in October 2017.
In the interim, they sued the buyers.
This was a summary judgment decision (i.e. a decision reached without the court having to undertake a full trial).
In order to be successful in the claim against them, the buyers would have had to establish that the sellers had not properly mitigated their damages stemming from the buyers’ breach of the agreement of purchase and sale. In order to do so, they had to show evidence that would suggest that relisting the property for $2.25 million had been unreasonable, and that is why the sellers ultimately lost the amount of money they did.
The court noted that the buyers did not provide any expert evidence that would allow the court to conclude that the listing of the property for $2.25 was unreasonable. In addition, the expert evidence they did present “[lent] credence to the [sellers’] conduct in listing the property in the manner that they did”.
The court went on to say that they could only wonder what would have happened if the property had been relisted and sold for a lower price, such as $2 million. In that case, it “would not be unreasonable to speculate that in all likelihood the [buyers] would have argued that the [sellers] should have listed the property for a higher price, thereby reducing their potential exposure to damages”. The court further noted that it was satisfied that when it became clear to the sellers that the buyers had repudiated their agreement, the sellers accepted that repudiation and began to mitigate their damages. Additionally, the court was “more than satisfied” that the sellers acted reasonably in re-listing the property in the way that they did, with eventually reducing the list prices twice before finally getting another offer that ultimately closed.
The court concluded that the sellers were entitled to damages based on the price they had contracted for with the buyers, and the price the home ultimately sold for.
The court noted:
The impact of this court’s decision will undoubtedly have a dramatic effect on the [buyers]. I have every sympathy for the [buyers]. With the changes in the real estate marketplace in the Greater Toronto Area, I have every expectation that there may be more cases where purchasers find that they have overextended themselves in a declining market. Purchasers would be well advised to consider making their offers to purchase contingent on financing, and for the sale of their existing home if they have one.
If you are involved in a dispute over a real estate transaction, including situations in which a buyer is not ready, willing and able to close on the agreed date or where a seller is unwilling to close as agreed, contact Financial Litigation. We are a boutique law firm with a unique focus on the financial aspects of legal disputes. Our difference is our responsiveness. When you retain Eli Karp in your real estate matter, you know you will receive personal service and excellent advice. Eli is available seven days a week, and can offer prompt, effective crisis management and legal guidance no matter when a problem may present itself. Schedule your consultation online, or by calling us at 416-769-4107 x1.