Entering a real estate contract is an exciting time for buyers and sellers. Buyers may be looking forward to a new home, cottage, or investment property, while sellers might be excited about the prospect of upsizing, downsizing, or going wherever their equity takes them. For any number of reasons, however, a breach of the real estate contract can occur – and both buyers and sellers need to familiarize themselves with their obligations in a real estate contract alongside the consequences of a breach (regardless of which party is responsible).

This blog post will outline how real estate contracts work, including the common types of breaches of real estate contracts, the implications, and the remedies available for both buyers and sellers.

An Introduction to Real Estate Contracts

If you agree to purchase or sell a property in Ontario, you will need to enter into a contract of purchase and sale for the property. This contract will outline, among other things, how much the buyer is providing for a deposit along with the closing date (the date on which the seller will transfer the ownership of the property to the buyer).

Additionally, real estate contracts will usually include “subject clauses”. These clauses make the real estate contract conditional on certain things happening, such as the buyer obtaining financing or the results of a satisfactory home inspection. For example, if a real estate contract is subject to the buyer obtaining financing and the buyer cannot obtain financing before the closing date, they may be able to escape the contract without facing repercussions from the seller.

When is a Real Estate Contract Breached?

When a breach of a real estate contract happens, either the buyer or the seller fails to follow through with the contract terms. This can happen in a variety of situations.

Both buyers and sellers may be found to have breached a real estate contract if they choose not to proceed with the contract (for example, if either one of the parties gets “cold feet” and backs out of the deal). For further clarification, the following scenarios could lead to a breach of a real estate contract:

• Where a buyer elects not to proceed with a real estate contract because they were dissatisfied with the results of a home inspection. However, the real estate contract does not include a subject clause stating that the contract is subject to a satisfactory home inspection,
• Where a buyer relies on a subject clause in bad faith, such as claiming they were unable to secure appropriate financing even when appropriate, though perhaps unappealing, options were available to them, or
• Where a seller vacates the premises by the closing date but is unable to vacate their tenants by the closing date.

Ultimately, determining whether a breach of a real estate contract has occurred is highly dependent on the terms of the contract of purchase and sale. For example, the presence of a subject clause can make all the difference in determining whether a party’s action (or inaction) constitutes a breach.

Remedies for Breach of a Real Estate Contract

Similar to the causes of a breach of a real estate contract, the remedies available to parties who have suffered a breach will vary based on whether they are the buyer or the seller, along with the circumstances that led to the breach.

Remedies for Sellers in a Real Estate Contract Breach

When a buyer enters into a contract of purchase and sale, they will pay a deposit (usually around 10% of the purchase price) to demonstrate their commitment to the purchase. The deposit is typically held in trust by the seller’s real estate lawyer and the remaining purchase price amount will be paid to the seller when the contract is completed and the property is transferred to the buyer.

The deposit plays another important role in real estate deals. As such, if a buyer breaches a real estate contract, the deposit is typically forfeited to the seller as compensation. In some circumstances, the seller may sue the buyer for additional compensation if they breach the real estate contract. For instance, if the seller will not be able to sell the property for the same price the buyer agreed to pay, they may seek the difference in value from the buyer.

Remedies for Buyers in a Real Estate Contract Breach

Buyers typically have more potential remedies available if a seller breaches a real estate contract. While the buyer will seek to recoup their deposit from the seller, they may also seek monetary damages from the seller. In other cases, they may seek “specific performance” by attempting to compel the seller to follow through with the deal, or to deal with an issue that is preventing them from completing the contract.

Tips for Buyers and Sellers Entering into Real Estate Transactions

While breaches of real estate contracts can happen in any situation, buyers and sellers need to take appropriate steps to minimize their risk before entering into a real estate contract. Consider the following tips before signing a real estate contract to ensure your deal goes smoothly:

• Be ready to buy or sell: Buying or selling a property is often a pivotal moment in an individual’s life, so do not take these decisions lightly. Whether you are buying or selling, think carefully about your decision to ensure it is what you truly want – and to avoid having second thoughts after entering into the contract. For buyers, it is wise to seek pre-approval for a mortgage to ensure your financing is in order. Sellers, on the other hand, will want to consider their next steps after the property has been sold.
• Get an experienced real estate lawyer: Engaging an experienced real estate lawyer as soon as possible is essential for understanding your options and preserving your rights. While many buyers and sellers consult a real estate lawyer once they have already entered into a contract of purchase and sale, it may be worth speaking to a lawyer before signing to ensure you understand the legal ramifications of the contract.
• Use subject clauses: Subject clauses are commonly used in contracts of purchase and sale and should not be overlooked. For buyers, especially, it can be tempting to avoid subject clauses to make your offer more appealing to the seller. However, they are essential safeguards to ensure that you are protected if, say, you are unable to obtain appropriate financing.
• Work with the other party if issues come up: Sometimes, unexpected issues arise in a real estate transaction that can threaten the contract. However, these issues may be able to be resolved by simply working with the other party. Do not overlook the power of letting the other party know about your concerns and working with them to resolve the issue. For example, if the closing date needs to be moved back to sort out an issue, the other party may be more than agreeable to help. Generally, everyone is on the same side in a real estate deal and wants to achieve the same outcome.

Contact Baker & Company for Comprehensive Residential Real Estate Services in Ontario

The talented team of real estate lawyers at Baker & Company draw upon their extensive experience to provide buyers and sellers with the necessary information and support needed to protect their interests and successfully move through their real estate transaction. We pride ourselves on a client-focused and personalized approach to real estate matters. To speak with a member of our team regarding your real estate matter, contact us by phone at 416-777-0100 or reach out to us online.