Backing Out of a Real Estate Contract Due to COVID-19 | Baker & Co.
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As with everything else, the health pandemic has created a great deal of unease for those who entered into Agreements of Purchase and Sale for homes prior to our current situation. For various reasons, many people are left wondering if they have options to cancel contracts that were executed before the crisis hit. If not, people may be wondering what ramifications they would face for backing out of a closing. Below, we’ll address residential real estate contract obligations in light of COVID-19.

Property Values and Loss of Income

The two primary concerns buyers have with closing deals entered into in February or earlier are the potential drop in property values and loss of income. In many cases, both issues are a factor. With the closure of non-essential businesses throughout the province, many people have been laid off or are facing drastic reductions in income. Nearly one million Canadians applied for employment insurance benefits during the week of March 16th alone. Given the ongoing economic crisis, people have serious concerns about what effect this will have on property values in Ontario going forward. Considering we are still in the midst of a state of emergency, the long-term effects on housing prices won’t be known for some time.

Do people who have financial concerns have any recourse if they’re already entered into a contract?

Frustration of Contract and Force Majeure

We have previously discussed the potential for someone to argue frustration of contract or use a force majeure (or “Act of God”) clause to relieve themselves of liability in relation to COVID-19. Without specific language that considered a pandemic to be an event significant enough to walk away from the contract, this is a tough argument to make with most contracts. In a real estate context, it becomes even more difficult. Nearly all purchases and sales use the standard Ontario Real Estate Association Agreement of Purchase and Sale, which does not include such a provision. Parties are entitled to include additional clauses at will, however this must have occurred at the time the contract was executed in order to be valid.

There are previous examples of buyers seeking to back out of a purchase in light of an economic change. British Columbia introduced a foreign homebuyer’s tax in 2016 that had a significant impact on buyers from out of the province, which helped contribute to an overall decline in home prices. As a result, many buyers tried to get out of their contracts, however, they were not permitted. It is unlikely a court would find differently in light of the current circumstances.

Penalties for Backing Out

We have addressed the significant financial fallout that can occur when a person fails to close a real estate transaction in a previous blog, but it is worth noting again that it is not just a matter of losing one’s deposit. Buyers that fail to close could also face liability for a difference in purchase price if a seller is forced to re-sell at a lower price. One couple in Ontario had originally agreed to buy a home for $2.25 million and later backed out for financial reasons. When the seller resold, the price dropped to $1.77 million and the original buyers were found liable for the difference, which amounted to $470,000.

As demonstrated above, failing to close on an Agreement of Purchase and Sale can have hefty financial consequences for the party in breach, far beyond simply giving up the deposit. The housing market can fluctuate quite significantly and result in drastically different purchase prices just a few months later and the buyer who originally backed out may be forced to pay the difference in addition to legal costs. If you have concerns about a real estate deal you entered into prior to the pandemic, and questions about your rights and obligations, you should seek advice from an experienced real estate lawyer as soon as possible.

At Baker & Company in Toronto, our real estate lawyers take the time to meet with you and understand your unique needs in order to guide you through your real estate matter, whether commercial or residential.  We rely on our broad base of experience and expertise to provide exceptional legal advice and risk management in a variety of transactions, or through litigation. Call us at 416-777-0100 or contact us online for a consultation.

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