When the purchaser gets cold feet

Editor's Note

This article is sponsored by Perley-Robertson, Hill & McDougall.

There are inevitably situations as a real estate lawyer when a purchaser will want to back out of their agreement of purchase and sale. Market downturns or cases where financing becomes uncertain often result in situations where it becomes impractical or impossible to close a purchase. The COVID-19 pandemic has been no exception to this rule.

What purchasers are often not aware of is the extent of their liability if they decide to back out and default on their agreement. Time and time again, purchasers will assert to me that all they will lose when they fail to complete a purchase is their deposit. There is indeed established caselaw for the forfeiture of a deposit when a purchaser fails to close a purchase as negotiated. However, the damages the vendor is entitled to may be considerably more than the forfeited deposit. This article explores recent court decisions where purchasers have failed to close.

Forfeiture of deposit

In Azzarello v Shawqi (2019 ONCA 820 at para 45), Justice Feldman confirmed that when a purchaser breaches a purchase agreement, they automatically forfeit their deposit to the vendor. This is to occur even if the vendor suffered no losses in the purchaser’s default. In Azzarello, the purchaser had therefore forfeited a $75,000.00 deposit they had placed on a $1.55M agreement of purchase and sale that they ultimately failed to close.

For the purchaser in question, the loss of a deposit is subject to a remedy called relief from forfeiture. That is, the “court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise that are considered just” (Courts of Justice Act, RSO 1990, c. C.43, s.98). Therefore, the court could presumably require all or part of a deposit be returned if it feels that the vendor keeping all of it was inequitable or unfair.

The authority on whether or not a purchaser is entitled to relief from forfeiture is Varajao v. Azish (2015 ONCA 218) which sets out that in order to receive this relief, a purchaser must prove that 1) the forfeited sum of money is out of proportion with the damages suffered; and 2) that it would be unconscionable for the vendor the retain the money.  This concept has also been affirmed in the decision Redstone Enterprises Ltd. v. Simple Technology Inc. (2017 ONCA 282).

It is not clear how large a deposit needs to be before a court would consider it inequitable or unfair. In the recent decisions listed below, defendant purchasers made claims that the following deposits were subject to relief. However, the courts denied all relief claims and re-affirmed that the vendors were entitled to keep the entirety of a deposit:

  1. A $100,000.00 deposit for a $1.2M purchase agreement for a residential home in McGregor v. Tucci (2021 ONSC 4379).
  2. A $100,000.00 deposit for a $1.41M purchase agreement for a residential home in Keramati v Ko (2021 ONSC 3682).
  3. A $750,000.00 deposit for a $10.255M purchase agreement for a warehouse in Redstone Enterprises Ltd. v. Simple Technology Inc. (2017 ONCA 282).

What is particularly notable about McGregor and Keramati is that both vendors were able to resell the property shortly after the default for a higher purchase price than the original contracts. In Redstone Enterprises, the Court found no evidence of damages to the vendor. Therefore, it is safe to assume that most deposits will not be subject to any relief from forfeiture.

However, as also confirmed in Azzarello (supra, at paras 48-55), it is clear law that if the vendor is claiming damages, the said deposit must be credited against the resulting damages.

Assessment of damages

When a purchase agreement is breached, the court must determine what damages were suffered by the innocent party. The general principal for failure to close on a real estate agreement of purchase and sale is set out in Dobson v. Winton and Robbins Ltd. ([1959] SCR 775), in which a vendor was deemed entitled to the difference in price between the original contract and the new price of sale that the vendor had to eventually settle for. In addition, the Court awarded interest and the property tax payable between the date of the original sale and the later date where he sold the property to someone else.

Further cases where the purchaser defaulted on the transaction confirmed the following:

  1. The vendor is entitled to be compensated for any decrease in the purchase price;
  2. The vendor is further entitled to losses stemming from expenditures they made to resell the property, such as legal fees and any carrying costs such as property taxes, utilities, insurance etc…; and
  3. The deposit forfeited by the purchaser is credited towards the vendor’s damages.

Therefore, in cases of market decline, damages can be extensive. This is well illustrated in the recent case Greco v. Padovani (2021 ONSC 6249). In this case, the original purchase agreement stipulated a purchase price of $3,200,000.00. The purchasers defaulted due to financing issues and the vendors were later able to sell the property for only $1,950,000.00. The seller had already received $472,569.78 from the purchaser in deposits and other monies. The Court ordered that the defaulting purchasers pay the vendors an additional $817,756.08 to compensate them for both the decrease in purchase price, and the vendors expenses for property tax, insurance, utilities, legal fees and maintenance costs on the property between the date the original purchase agreement was supposed to close, and the date it actually did close with the new purchasers.

Other recent cases where substantial damages were ordered where purchasers failed to close include:

  1. Damages of $328,585.95 in Gundy et al v Ghuhmaan et al. (2021 ONSC 6036).
  2. Damages of $383,636.47 in Tribute (Springwater) Limited v. Atif (2021 ONCA 463).
  3. Damages of $652,390.93 in a default judgement in Forest Hill Homes (Cornell Rouge) Limited v. Wang (2020 ONSC 556).
  4. Damages of $304,990 in Arista Homes (Boxgrove Village) Inc. v. Lakhany (2019 ONSC 5189).

Conclusion

The damages that a purchaser may be subject to if they fail to close on an agreement of purchase and sale can be extensive. Therefore, purchasers need to be extremely careful when entering any purchase agreement to ensure they will be able to complete it on their closing date. Any purchaser who is in a situation where they may not be able to close should consult with their real estate lawyer for options and assistance.

Amy Jackson is a real estate lawyer at Perley-Robertson, Hill & McDougall. Her practice focusses on residential and commercial real estate, working with buyers, sellers, lenders, developers, and investors in various real estate transactions. She also assists clients with the preparation of their Wills and Powers of Attorney. If you have questions about the foregoing information, please reach out to ajackson@perlaw.ca.