Whenever there is a market cooling off, downturn or a pandemic like coronavirus real estate lawyers and real estate litigation lawyers inevitably receive inquiries regarding what happens if there is a failure to close an Ontario real estate transaction.
There exists the common misconception that a buyer will only have to forfeit the deposit if they fail to close. This article will start by analyzing the law in relation to forfeiture of deposit in Ontario and subsequently analyze the full extent of damages that may be available where a buyer fails to close. A separate article will be written to address the law in relation to where a seller fails to close.
Where a buyer fails to close, in most circumstances the deposit will be forfeited.
In Azzarello v. Shawqi, 2019 ONCA 820 (CanLII) Justice Feldman clearly outlines the law in Ontario in relation to deposits where a buyer fails to close the transaction at paragraph 45 as follows:
“It is well-established by case law that when a purchaser repudiates the agreement and fails to close the transaction, the deposit is forfeited, without proof of any damage suffered by the vendor: see Tang v. Zhang, 2013 BCCA 52, 359 D.L.R. (4th) 104, at para. 30, approved by this court in Redstone Enterprises Ltd., v. Simple Technology Inc., 2017 ONCA 282, 137 O.R. (3d) 37+4. Where the vendor suffers no loss, the vendor may nevertheless retain the deposit, subject to relief from forfeiture.”
In Azzarello, the purchase price was $1,555,000 and the deposit forfeited was $75,000.
In Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA 282 (CanLII) the Ontario Court of Appeal determined that the buyer who failed to close a $10,225,000 real estate transaction due to lack of financing had forfeited a $750,000 deposit even though no evidence was presented before the court as to whether the seller had suffered any damages.
Justice Lauwers in Redstone Enterprises performed a thorough analysis of whether forfeiting the $750,000 deposit was unconscionable. At paragraph 26, Justice Lauwers answers whether unconscionability can be established due to disproportion between the damages suffered and the amount which is forfeited as follows:
“While in some circumstances a disproportionately large deposit, without more, could be found to be unconscionable, this is not such a case.”
In Liu v. Coal Harbour Properties Partnership, 2006 BCCA 385 (CanLII) Justice Hall found that it was not unconscionable for the buyer to have to forfeit a 20% deposit when they failed to close on a condo purchase. The deposit forfeited in this case was $391,000 on a $1,955,000 purchase price.
The general measure of damages was outlined by the Supreme Court of Canada in the 1959 decision of Dobson v. Winton & Robbins Ltd., 1959 CanLII 19 (SCC), [1959] S.C.R. 775,
“The measure of damages in this case is the difference between the price provided for in the first contract, $75,000, and the price provided for in the second contract, $70,000. Counsel for the appellant admits that against the difference of $5,000 must be credited the deposit of $4,000.”
More recent case law suggests that almost all costs the vendor incurs in relation to reselling the property should be factored in. The general principle is to put the seller in the place they otherwise would have been had the buyer completed the transaction. In Azzarello v. Shawqi, 2019 ONCA 820 (CanLII) Justice Feldman makes it clear what the law is in Ontario at paragraph 53 in which he begins by agreeing with the analysis in Dobson.
“I agree with this analysis. While the agreement only specifically calls for the deposit to be credited to the purchase price on completion of the agreement, the measure of damages is based on the difference between the purchase price and the lesser amount that the property sold for after the purchaser’s default. In other words, it is based on the vendor receiving the purchase price that was bargained for. One can infer that the intent of the parties was that the deposit be applied to the purchase price whether received on completion or as damages.”
In Azzarello, the purchaser agreed to pay $1,555,000 and subsequently failed to complete the transaction. The seller ultimately was able to sell the house to a different purchaser for $1,280,000. The Ontario Court of Appeal awarded the seller damages for staging, legal fees, carrying costs of the property, interest on the line credit and most importantly the difference in sales price.
In Azzarello the purchaser originally agreed to pay $1,555,000. Subsequently, the purchaser was willing to actually close the transaction for $1,400,000 which was $120,000 more than the vendors were able to sell the property for. Justice Feldman makes clear his position on this issue at paragraph 37 as follows:
“However, even if the appellant had made an offer to pay 10% less for the property and not be released from his obligation under the agreement of purchase and sale, I would reject the suggestion that the duty to mitigate obliges a vendor to accept an offer from the defaulting purchaser for less than the agreed price and then to have to sue the purchaser for the difference from the original agreed price.”
The seller in this case was awarded damages based on the amount they sold the property for in the end and not based on the reduced offer by the buyer who failed to close. This case would suggest that a seller does not have an obligation to accept a reduced offer by a buyer who fails to close in order to mitigate their damages.
One of the most common defences where a purchaser fails to close a real estate transaction is that the vendor failed to mitigate their damages. Unfortunately for purchasers who fail to close real estate transactions the standard is not one of perfection and it is rather uncommon for Judges to find that the sellers failed to mitigate their damages in this area.
The law in relation to the duty to mitigate where a buyer fails to close a real estate transaction can be summarized as follows:
In the recent case of Malatinszky v. Miri, 2020 ONSC 16 (CanLII), Justice Perell performed an excellent outline of the duty to mitigate. In paragraph 80-83 Justice Perell wrote as follows:
“With respect to the issue of mitigation, the onus is on the defendant to prove any failure to mitigate, but the plaintiff must prove his or her calculation of damages. Thus, the plaintiff must adduce evidence of the contract price and of the market price or resale price upon which he or she relies in establishing the loss of bargain and then the onus is on the defendant to show, if he or she can, that if the plaintiff had taken certain reasonable mitigating steps, then the innocent party’s losses would be lower.
Where it is alleged that the plaintiff has failed to mitigate, the burden of proof is on the defendant, who needs to prove both that the plaintiff has failed to make reasonable efforts to mitigate and that mitigation was possible.
In assessing the innocent party’s efforts at mitigation, the courts are tolerant, and the innocent party need only be reasonable, not perfect; in deciding what is a reasonable way to mitigate the effects of a breach of contract, the innocent party is not to be held to too nice a standard; it need only act reasonably, using what it knows then, without hindsight, and it need not do anything risky.
It is not a failure to mitigate when an innocent vendor refuses the defaulting purchaser’s revised terms to purchase the property at a lower price.”
In Talisman Homes Ltd. v. Endicott (2002), 2 R.P.R. (4th) 109 (Alta. Q.B.) the defendants successfully argued that the vendor failed to mitigate their damages. In this case Justice Lomas made findings that minimal effort was made to resell the home, the fair market value was actually higher than the original sales price, the vendor failed to contact interested parties and the vendor waited to list the home without any reason for doing so. An excerpt of the case can be found here.
Due to the Coronavirus many purchasers and vendors fear the market will decline. Additionally, million(s) of Canadians have lost their jobs or been put on temporary layoff. It goes without saying that many purchasers will fail to close real estate transactions in 2020.
The additional issue in play is their exposure will likely be higher than in times when the market is booming. When the market is hot or booming and prices are steadily rising it is less likely the vendor would have a claim for the difference in sales price as the vendor will often be able to sell at an equivalent or higher sales price. As a result, in many scenarios the purchaser’s loss will end up being their deposit and perhaps some incidental fees such as staging costs, real estate lawyer costs etc.
When the market falls or decreases and the seller is stuck reselling a property for less the buyer who fails to close is generally subject to being liable for the difference in sales price and incidental costs.
What most buyers who are unable to close due to coronavirus related events want to know is whether they have a defence based on the current pandemic. The answer to this question is unfortunately likely to be no. The courts have already held in past cases that a drop in market prices is foreseeable and not subject to force majeure.
Justice E.M. Morgan makes this clear at paragraph 6 of his reasons in Forest Hill Homes v Ou, 2019 ONSC 4332 (CanLII) where he wrote as follows:
“Even if there were evidence to support the Defendants’ assertion, there is nothing about a change in the market that amounts to an unforeseen event that substantially changes the agreement. This was confirmed in Paradise Homes North West Inc. v Sidhu, 2019 ONSC 1600, at para 11, where the court reasoned that a change in the market is not the kind of radical change that transforms the nature of the contract:
In this case, the defendant defaulted because he was not able to borrow the amount of money he required to close the deal…. While he states that he was unable to borrow the money because the market prices fell and that this was unforeseen and such a radical change that it completely changed the nature of the APS. I do not find that to be the case. The contract was not rendered totally different from what the parties had intended. The parties had intended that 10 Truro Circle would be sold by the plaintiff to the defendant for the agreed-upon amount of $819,990. The contract did not change and was not altered.”
A 2020 case that was before Justice Perell relating to a significant market decline and purchaser failure to close is Forest Hill Homes (Cornell Rouge) Limited v. Wang, 2020 ONSC 556 (CanLII). In this case the purchaser with adjustments agreed to pay $1,937,537.72. The purchaser made $155,000 in deposits and in both March of 2018 and July of 2018 advised the seller he may not close on November 9th, 2018. The purchaser failed to close on the closing date and the vendor was only able to resell the property for $1,294,990. The vendor had two appraisers who determined the property was valued at $1,020,000 and $1,075,000. Justice Perell determined that the purchaser was liable for $652,390.93 in damages for breach of contract. This included the following damages:
It seems likely that the courts will apply a similar approach to a market decline flowing from the coronavirus. Purchasers who fail to close due to coronavirus related events should expect to be sued for all costs and losses flowing from their failure to close the transaction. Exceptions will likely exist where extremely diligent purchasers added in clauses relating to contract termination due to pandemics, state of emergencies etc.
In an ideal world you will always be able to complete your contractual agreements. However, there are scenarios where a buyer simply cannot close due to no longer being able to obtain financing, job loss, divorce etc.
McMackin Law can help you with your real estate law and real estate litigation issues.