Failure to Close a Real Estate Deal

Real Estate in the GTA

In recent years, the GTA (Greater Toronto Area) has experienced a hot housing market climate characterized by aggressive bidding wars. To bring the offer to the top of the pile, purchasers offered hundreds of thousands of dollars over asking, while others made offers without conditions.

Lately, however, the real estate market has cooled off. In addition, the rising mortgage rates as well as fears of recession have caused purchasers to rethink real estate transactions that have not closed yet.

Purchasers considering walking away from a deal must be aware of the risk of litigation. Regardless of whether the purchaser is experiencing buyer’s remorse or is unable to secure a mortgage, those who fail to close are in default and face severe consequences in the form of damages.

Where the purchaser has defaulted, the law is on the side of the vendor and attempts to place the vendor in the same position in which they would have been if the contract had been performed. As a result, the vendor has the right to sue and obtain a judgement against the defaulting purchaser for the losses arising from a failed real estate transaction.

Failure to Launch

If the vendor takes the litigation route, in addition to legal costs, the defaulting purchaser will likely endure the following financial consequences:

(i) forfeiture of the deposit;
(ii) liability for the difference in value between the sale price agreed upon in the Agreement of Purchase and Sale and the resale price the vendor can obtain upon relisting of the property less the amount of the deposit;
(iii) costs accrued by the vendor until re-sale, such as maintenance and carrying costs, property taxes paid after the scheduled closing, etc.

As indicated above, changes in the purchaser’s circumstances, such as loss of employment, fluctuations of mortgage rates or swings in real estate market conditions do not relieve the purchaser from their obligations under the agreement.

While the vendor is required to minimize their loss, the duty to mitigate is not measured by the standard of perfection but by that of reasonableness. Therefore, the seller’s reasonable attempts to remarket and resell the property will likely satisfy the duty to mitigate.

Given hefty consequences to the purchaser who is unwilling or unable to close the real estate transaction, the purchaser may want to consider alternative avenues to avoid litigation. The vendor may also be motivated to strike a compromise and avoid costly and time-consuming litigation, especially against a judgment proof purchaser (someone without sufficient assets to pay off a court order). The following routes may be available to resolve the situation:

1. Attempt to close by
   (i) exploring other options to secure financing;
   (ii) asking the vendor for an extension; or
   (iii) renegotiating a sale price with the vendor for less than originally agreed upon. Be aware that there is no obligation on the vendor to accept the reduced offer.

2. Forfeit the deposit for a mutual release;

3. Engage in alternative dispute resolution to settle the claim through negotiation.

If you are a purchaser who is unable to close a real estate deal or a vendor whose purchaser has defaulted, our law firm will be able to assist you in resolving this matter.