As the housing market gained momentum in late 2024, with prices increasing by 3.8% year-over-year, many buyers were drawn back into the market. However, fluctuating prices and regional variability—from Quebec City’s significant 11.3% rise to Toronto’s more modest 2.3%—mean buyers must approach transactions cautiously. While revised mortgage policies, such as expanded 30-year amortizations and higher insurance caps, aim to improve affordability, they may also encourage buyers to stretch their budgets. This can become problematic if unforeseen financial challenges arise, leaving buyers unable to close their deals.
Consequences of Backing Out of a Real Estate Deal
In a competitive market with rising prices, failing to follow through on a purchase agreement can lead to serious consequences. Beyond disappointment, buyers who back out risk:
- Forfeited Deposits: Buyers may lose their deposit, which is often a substantial amount, as compensation to the seller for their time and effort.
- Lawsuits for Damages: Sellers can pursue legal action to recover losses incurred due to the buyer’s failure to close. This may include covering the difference if the property sells for a lower price.
- Being Forced to Complete the Purchase: In some cases, courts may enforce the sale and require the buyer to fulfill their obligations under the Agreement of Purchase and Sale (“APS”).
Wynn v Kentris: A Real-Life Example of the Consequences of Failing to Close
A recent Superior Court of Ontario (“ONSC”) case, Wynn v Kentris, highlights the significant financial consequences for buyers who fail to close a deal.
When a party fails to close a real estate transaction, they may be liable for several forms of damages, which the Wynn case demonstrates:
- Difference in Sale Price: In this case, the Plaintiffs suffered a loss of $370,000 due to the Defendants’ failure to close the transaction. The difference between the agreed-upon purchase price of $1.85 million and the final sale price was a direct result of the breach. The ONSC held that the Defendants were responsible for this loss.
- Carrying Costs: The failed sale resulted in additional costs, including property taxes, for the Plaintiffs between September 2022 and January 2023. These costs were also attributed to the Defendants’ breach.
- Legal Fees: The Plaintiffs incurred legal fees related to the aborted transaction. The court recognized these costs as part of the damages they were entitled to recover.
Did the Sellers Mitigate Their Damages?
While the Plaintiffs were entitled to compensation, they also had a duty to mitigate their damages. In Kentris, the Defendants argued that the plaintiffs should have mitigated their losses by accepting a vendor take-back mortgage, but the court rejected this argument. The Plaintiffs had no obligation to entertain such a proposal, especially given that the Defendants had already failed to meet the terms of the Extension Agreement.
The case also emphasized that mitigation does not need to be perfect. Plaintiffs must only act reasonably to try to reduce their losses. In this case, the Plaintiffs took reasonable steps by actively marketing the property, reducing the asking price, and accepting the first legitimate offer.
Wynn v Kentris, 2024 ONSC 3347 [Wynn].
Navigating Unforeseen Territories: Legal Ways to Back Out of a Transaction
An APS is a legally binding contract, but there are limited circumstances where a buyer may back out without significant consequences. These include:
- Unmet Conditions in the Agreement
An APS often includes specific conditions that must be satisfied for the transaction to proceed, typically to protect the buyer’s interests. If these conditions are not met, the buyer may have the right to withdraw from the deal without facing legal or financial penalties. Common examples include:
- Financing Contingency: If the buyer is unable to secure financing for the purchase, they may be able to terminate the agreement, provided this condition was included in the APS.
- Home Inspection Clause: If the property inspection reveals significant issues that the buyer is unwilling to accept, they may choose to exit the deal.
- Other Agreed-Upon Conditions: These could include the selling of the buyer’s existing home or obtaining necessary permits for renovations.
How Sabio Can Support You
With housing access and affordability expected to dominate the federal election agenda, pending policies—such as changes in mortgage regulations and tax implications—could further shape buyer behaviour. Therefore, it is critical to understand your obligations as a buyer before signing an APS.
At Sabio, we specialize in real estate litigation and advise buyers and sellers on their rights and obligations under an APS. Before entering into or exiting a real estate deal, it’s crucial to seek legal advice. By understanding the terms of your APS, you can avoid litigation and protect yourself from serious financial repercussions.
If you have questions or need assistance with a real estate transaction, contact Sabio today to ensure your interests are protected.
The content provided is for general informational purposes only and does not constitute legal advice. Each real estate transaction and situation is unique, and tailored legal guidance is essential to address your needs. If you have legal questions or concerns, it is strongly advised to consult with a qualified lawyer.