Aug 26
Potential Problems in Real Estate Transactions - rplawyers.ca

Potential Problems in Real Estate Transactions

Read Time: 5 minutes

Investing in property is often an individual’s largest investment. The process of viewing properties, making an offer and moving into a new home can be exciting. However, like any legal contract, there are some risks involved and problems that can arise.

Here are a few potential problems that can arise in a real estate transaction:

Drafting Errors

Once the Agreement of Purchase of Sale (“APS”) has been signed by both parties, a legally binding contract is formed. But what happens when there is an error in this document?

Where the parties are both willing, a simple amendment to the agreement can be signed that reflects the true intentions of the parties.

Sometimes parties may have a change of heart about the transaction and they may use this error to try to back out of the agreement.

Rectification is an equitable remedy available by the courts where the parties reached an agreement but recorded it incorrectly in the agreement. Pursuant to the SCC case Canada (Attorney General) v Fairmont Hotels Inc., in order for rectification to be ordered by the court there needs to have been the following:

  • A prior agreement between the parties with definite and ascertainable terms;
  • The agreement was still in effect at the time the instrument was signed;
  • The instrument fails to accurately record the terms of the agreement; and
  • If rectified, the instrument would carry out the parties’ prior agreement.

In order to avoid headaches, it is best to review any APS carefully before you sign, especially where there have been many counteroffers back and forth. It is also advisable to have a real estate lawyer review your APS, even if this means spending more on legal fees. It is crucial to utilize an experienced and detail-oriented realtor throughout the offer process.

Failure to Obtain Financing

It can be tempting to take a risk and make an offer with no conditions during a hot sellers’ market involving lots of competition amongst buyers. However, this is a risky decision if you will be relying on financing to complete the transaction.

If you find yourself unable to close the transaction because you cannot obtain financing, you could be facing a lawsuit if the vendor decides to take legal action against you. For example, the vendor could seek damages for loss in market value since the date of your APS, or for having to sell to another buyer for a lesser amount.

It is advisable to always obtain a financing pre-approval before you make an offer and include a financing condition in the APS. The financing condition offers you some protection in case you are unable to obtain financing.

Breaching Contracts

Just like any legal contract, breaching an APS can result in litigation between the parties and can have serious consequences.

A breach can occur if either party fails to meet one of their obligations pursuant to the APS or sometimes parties have regrets about the transaction and try to back out. For example, a buyer would be unable to meet their obligations to the APS if they were relying on funds from the sale of another property in order to complete the transaction and they were unable to sell that property, could not come up with another way to obtain funds, and the APS did not contain a condition protecting them from this scenario.

Each party to the APS should ensure that the agreement contains whatever conditions are necessary to ensure that they are able to meet all their obligations. Common conditions can include financing, sale of current property, or obtaining a satisfactory inspection of the property.

Hidden Defects

When buying a used residential property, some minor visible defects are to be expected. These are called “patent defects”. For example, a cracked tile or a hole in the wall would be considered a patent defect.

However, sometimes more serious defects that are not easily detectable are discovered after the transaction has been completed. These are called “latent defects”. For example, faulty electrical wiring or a crack in the foundation would be considered latent defects. If a latent defect is discovered, the vendor may have some liability to the purchaser. Please see our article, Caveat Emptor in Real Estate Transactions, for more information about defects in real estate transactions.

Please contact Michael Paiva at 416.800.1733 or at 519.729.5038 for more information, or if you require assistance with a real estate transaction or real estate litigation.