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In today’s competitive housing market, it is becoming more and more common for purchasers to enter into an Agreement of Purchase and Sale with no conditions. Where it was once standard for a purchaser to insist on a home inspection and financial approval before finalizing a deal, the fierce competition means that people may be willing to take a bigger risk in order to secure the home of their dreams.

However, this can be a big risk that may result in significant cost to the purchaser should they be unable to secure financing in time before the closing, as illustrated in a recent decision of the Ontario Court of Appeal.

Financing Troubles After the Fact

In the case at hand, the vendors listed their home for $1,398,000. The market was especially active at this point in time and there were multiple offers. The vendors ultimately accepted the purchaser’s offer of $1,555,000. The closing date was set for two months later. In the meantime, the vendors agreed to purchase a new home closing a month before their sale, and took out bridge financing to cover the gap in between the transactions.

Leading up to closing, the purchaser’s lawyer was in communication with the vendor’s lawyer. The vendors’ lawyer sent a closing package to the purchaser’s lawyer 10 days before closing. Then just two days before the deal was set to be finalized, the vendor’s lawyer was informed that a new lawyer had taken over in representing the purchaser and asked for an extension on the closing date by approximately a week. A few days later, the purchaser requested a further extension for another three days.

The vendors agreed to the extension, provided the purchaser agreed to pay the additional interest on their mortgage, line of credit and bridge loan. the purchaser agreed. On the new closing date, the purchaser’s lawyer advised that she did not yet have mortgage instructions from a financial institution. Later that day, she followed up to let the vendors’ lawyer know that the purchaser had ceased communication with her.

Meanwhile, the purchaser applied for a mortgage with two financial institutions and was denied. He informed his real estate agent that he would not be able to purchase the home.

When the transaction did not close, the vendors re-listed the home at the original asking price. Nearly two weeks later, their lawyer was contacted by a new lawyer for the purchaser, saying he had received approval on a mortgage and sought a 10% reduction in the price of the home. They responded with a proposal to resolve the matter and did not receive a reply. The vendors ended up selling their home for considerably less than the original sale – a difference of $275,000. The vendors brought an action against the original purchaser for damages.

The Deposit & The Damages – One and the Same?

The purchaser claimed that he had never needed financing approval to purchase the home because he had intended to pay with cash. He further argued that the vendors had not fully tendered for closing and had further failed to mitigate their damages by not accepting his offer to purchase the home at a reduced price.

The motions judge held that the purchaser could not rely on the defence of tender when he was clearly not in a position to close the transaction. Further, while it had been open to the vendors to accept the purchaser’s offer to close and pay a reduced price, they could not be obligated to do so. Further, the judge found that the vendors had taken reasonable steps to mitigate by not accepting the first offer once the home was re-listed and instead waited for the best possible price. The judge awarded the vendors damages for the difference in the purchase price, as well as costs of re-staging the home, carrying costs and interest, totalling over $300,000. Further, the judge held that the purchaser had forfeited his deposit, which would not be credited toward the damages award. The purchaser appealed.

The Court of Appeal dismissed the purchaser’s appeal except with respect to the issue of the deposit. The purchaser argued that the deposit should be credited towards the total amount of damages, and the Court of Appeal agreed, finding:

While the agreement only specifically calls for the deposit to be credited to the purchase price on completion of the agreement, the measure of damages is based on the difference between the purchase price and the lesser amount that the property sold for after the purchaser’s default. In other words, it is based on the vendor receiving the purchase price that was bargained for. One can infer that the intent of the parties was that the deposit be applied to the purchase price whether received on completion or as damages…The motion judge in the instant appeal erred in law by holding that the deposit be forfeited and not credited to the vendor’s damages.

Exercise Caution Before Signing an Agreement

As demonstrated above, failing to close on an Agreement of Purchase and Sale can have hefty financial consequences for the party in breach. You may be held liable for interests and carrying costs, but there is also the consideration of the purchase price. The housing market can fluctuate quite significantly, and as in this case, result in drastically different purchase prices just months apart. While the temptation to enter into an Agreement condition-free is strong when the market is hot, purchasers are advised to complete their due diligence in advance and know their financial situation before they begin a house search in earnest.

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 416-777-0100or contact us online for a consultation.

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