Backing Out & Real Estate Rules
Residential real estate purchases are not always a straight-forward process. Sales can take weeks between offer, acceptance and the deal “closing”. During these uncertain times, a lot can change between signing an Agreement of Purchase and Sale (“APS”) and closing. A buyer may experience buyer’s remorse, feel they have overpaid for the property or have their financial circumstances change unexpectedly. For whatever reason, a buyer wanting to back out should realize that the process is not without risks and potentially large consequences.
With the current COVID-19 health crisis, buyers may be wondering if there is a way to use the pandemic as a force majeure (an “Act of God” or other unforeseeable circumstance) to release them from their contract.
In Ontario, most real estate agents use the Ontario Real Estate Association’s (“OREA”) standard agreement forms that contain many of the standard terms and conditions that are regularly used in a real estate transaction. A buyer hoping to rely on a clause in these OREA forms to renege on their purchase may be left disappointed. There is no built-in force majeure clause in the OREA form, nor is there a built-in clause that makes a purchase conditional upon a satisfactory inspection of the buyer.
If a buyer wants these protections, as with any protections not already contained in the OREA form, they must ensure that the person drafting their particular OREA form includes these provisions in Schedule A, which is an additional schedule that can be included with more deal-specific terms and conditions.
Without inserting clear conditions into the APS, a buyer, and their lawyer, could be limited by the terms of the contract and how courts have interpreted similar situations.
Even if an APS contains a force majeure clause, there is a high bar to using this clause to back out of a deal. To rely on this clause a purchaser must demonstrate that the COVID-19 pandemic, or another unforeseeable event, has made it impossible to complete their obligations. A court will likely not accept an impossibility argument simply because the obligations became more expensive or difficult to fulfill.
There is not much leeway in Ontario for buyer’s looking to cancel their real estate purchase, unless very clearly provided in the agreement terms. If a buyer does decide to back out, the seller can argue that they are entitled to keep the deposit and sue the buyer for the loss in value of the property on a resale. The consequences for a buyer breaching its contract can be substantial and far exceed the initial deposit. In the 2018 Ontario decision of Bang v Sebastian, the buyer was liable for over $120,000 in damages, which included the lower resale price and extra financing charges, as a result of failing to close their purchase.
So how can a buyer avoid these pitfalls and mitigate their risks? A buyer can consider:
- consulting their lawyer before signing an APS to see if there are terms in the contract that can be added to adequately protect them from unforeseen circumstances;
- adding a clause that makes the purchase conditional on obtaining necessary financing;
- obtaining bridge financing to assist with gap between the time your existing home is sold and your new property is purchased; or
- working with the seller by negotiating amendments to the APS instead of unilaterally breaching, such as postponing closing.
Buyers may find walking away from their deal is not as simple as they think and may cost more than just their deposit. It is important for buyers to recognize and understand these risks and liabilities of breaching their APS.
At KMB Law our real estate group works together with you to protect your interests and address your concerns. Please contact Ann Twigg to discuss further.This article is provided for general information purposes and should not be considered a legal opinion. Clients are advised to obtain legal advice based on their specific situations.