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Agreements of Purchase and Sale: The Consequences of a Breach
Rapidly changing and volatile housing markets, like we have experienced in the last few years in Toronto and the GTA, lead to an increase in cancelled real estate transactions. This occurs particularly when demand for houses, and consequently prices for houses, are high, which can also be referred to as a “hot sellers’ market”. Buyers often feel pressure to waive conditions and make quick and high bids in order to secure the home they want; they often enter into agreements without understanding the risks of doing so.
The Standard Agreement of Purchase and Sale
The Agreement of Purchase and Sale “APS” is a legally binding document that sets out terms and conditions of the transaction agreement. Typically, a standard APS, such as the OREA form, is used which can then be customized by striking out clauses and adding other conditions or terms. Some of the standard clauses include the completion date, closing arrangements, requisition date and time limits. Conditions that may be added include financing, sale of current property or obtaining solicitor’s approval. These conditions must be met or waived in order to complete the transaction.
Where the Buyer is at Fault for Breaching the Deal
The buyer can be at fault for breaching an APS if they are unable to meet their obligations. This could happen if the buyer bids too high, is unable to obtain financing or is relying on the sale of their current property. Even if the buyer is slightly late in making a payment, the seller is not obligated to accept the payment and close the deal. This is because of the “time is of the essence” clause contained in most standard APSs. In 1473587 Ontario Inc. v Jackson, the buyer was two days late delivering the deposit cheque. In that time, the seller found a new buyer willing to pay a higher price and refused to accept the late deposit. The Court determined that the seller was not obligated to follow through on the transaction with the original buyer because the APS contained a “time is of the essence” clause, making the late payment a fundamental breach of the contract.
Typically, there is a higher risk for the buyer than the seller when they sign an APS.
Here are some potential consequences for a buyer if they breach the APS:
- Lost Deposit
The seller is almost always able to keep the deposit, even if they suffer no losses. For example, the seller can keep the deposit even where they are able to find a new buyer willing to pay a higher price in a rising real estate market. This was confirmed in the British Columbia Court of Appeal in Tang v Zhang, and has been followed in the Ontario Court of Appeal in Redstone Enterprises Ltd. v Simple Technology Inc. The Appeal Court stated that the seller is not entitled to keep the deposit where it would be unconscionable due to the high amount of the deposit in proportion to the sale price. Courts have determined that deposits within the range of 5-20% are not unconscionable. In Redstone Enterprises Ltd. v Simple Technology Inc. the Court determined that a deposit of 7% was not unconscionable.
- Additional Damages
The seller can sue for additional damages, such as a decrease in the market value of the property in a falling real estate market. The seller must show that they took steps to mitigate their losses, such as prudent efforts in marketing to get a reasonable price in the current market conditions or an inability to find another buyer.
Where the Seller is at Fault for Breaching the Deal
The seller can be at fault for breaching an APS if they back out of a deal due to regrets about selling their property, or where they feel like they accepted too low of a bid and could obtain a higher one.
While there aren’t as many risks to a seller who breaches an APS, here are some potential consequences:
The buyer can sue the seller for damages, such as an increase in market value of similar properties in a rising real estate market. The buyer must be able to prove the specific monetary amount of these damages.
- Specific Performance
The buyer can seek an order for “specific performance” from the Court that triggers the completion of the transaction. This remedy is only available if the buyer can prove that the property is unique and that a substitute is not readily available, as stated in the Supreme Court of Canada in Semelhago v Paramadevan. Because this is a subjective perspective, this is usually very challenging to prove in Court.
Ways to Protect Yourself as a Buyer
Because of the heightened risk for a buyer, it is important for the buyer to take steps to protect themselves. Here are some things the buyer should think about:
- Obtain Advice
Obtain advice from a lawyer and a real estate agent and think carefully before signing the APS. Rushing into a legally binding contract is not advisable. Real estate commissions are paid for by the seller so there is no reason to make a purchase without a realtor.
- Input Conditions into the APS
Conditions such as financing, inspection, or the sale of another property, if not waived by the buyer, can be used to back out of the APS if they cannot be met and allow for the buyer to have their deposit returned. However, even if the buyer does not formally waive or meet a condition but continues to act like they intend to close the transaction after the condition date has passed, the Court may assume that the buyer has implicitly waived the condition. Conditions cannot be used as an excuse to back out of the deal where the buyer has an ulterior motive, such as buyer’s remorse.
- Assess your Financing Options
It is important to look at financing options before making an offer. This can be done by obtaining a pre-approval for financing or talking to a financial advisor. However, these options do not guarantee that you will ultimately be approved for financing. “Bridge financing” can sometimes be used as a temporary financing option when the buyer is relying on the sale of their current property to fund the purchase. This can provide security if the sale falls through or if the sale is scheduled to close after the purchase date.
- Strike Out the “Time is of the Essence” Clause
If the Buyer has bargaining power, they should consider striking out the “time is of the essence” clause in the standard APS. This may not be practical in a hot seller’s market where there will likely be bidding wars between buyers, however it could be beneficial to a buyer if they are late delivering the deposit or payment on the closing date.
APSs are legally binding agreements that should not be entered into without fully understanding the risks involved. Buyers especially need to be aware of the risks before they enter into an APS due to the heightened risk for buyers if they cannot meet their obligations. Contact a lawyer before entering into an agreement to ensure that you understand the terms, conditions and risks involved.
Please contact Michael Paiva for more information about agreements of purchase and sale, or if you require assistance with a potential breach of an agreement of purchase and sale.
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