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Backing Out of a Real Estate Transaction in Ontario Legal Implications

Backing Out of a Real Estate Transaction in Ontario: Legal Implications

Real Estate Law

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Real estate transactions involve significant financial implications and legal formalities. However, situations might arise when a party wants or needs to withdraw from a transaction. In Ontario, the legal consequences of such a decision can be substantial. This article explores the legal implications individuals and entities might face when retracting from a real estate agreement in this jurisdiction.

Understanding your Agreement of Purchase and Sale

Agreement of Purchase and Sale (APS) is a legally binding contract. Once both parties – typically the buyer and the seller – sign this agreement, they must follow through with the terms. Backing out of the deal without following the terms of the APS can have significant consequences.

Potential Consequences of Backing Out from Real Estate Transaction

Loss of Deposit: One of the immediate repercussions for buyers who renege on an APS is the forfeiture of their deposit. This deposit is a good-faith gesture, showcasing the buyer’s serious intent to purchase. The seller typically retains the deposit if they back out without a valid reason as stipulated in the contract (such as a failed financing clause).

Lawsuits for Damages: If the seller can’t secure another buyer for the same price or if the subsequent sale price is lower, they can sue the initial buyer for the difference. Other incurred costs, such as storage fees, temporary housing, or additional legal fees, can also be subjects of the lawsuit.

Additional Costs: Legal proceedings can bring other costs to light, such as storage fees, interim housing expenses, seller’s legal fees, mortgage carrying costs and any other losses the seller suffered.

The case of Gamoff v. Hu, 2018 ONSC 2172, is an illustrative example of the severe consequences that can befall buyers who fail to honour their commitments in real estate transactions.

Specific Details of the Case:

  1. Background:
    • The Gamoffs (the sellers) listed their property for sale in Ontario.
    • The Hus (the purchasers) made an offer of $2.25 million on the property, even though the listing price was $2 million.
    • The offer was accepted, and both parties entered into an Agreement of Purchase and Sale.
  2. Issue with Financing:
    • Subsequently, the Hus encountered difficulties with their financing. The combination of their approved mortgage amount and the assessed value of a property they owned wouldn’t allow them to secure the required funds to finalize the purchase.
    • As a result, they could not complete the purchase of the Gamoffs’ property by the closing date.
  3. Relisting and Resale:
    • The Gamoffs then had to relist their property.
    • They eventually sold it for $1.78 million, a considerable drop from the initial $2.25 million offer from the Hus.
  4. Legal Proceedings and Verdict:
    • The Gamoffs initiated a civil lawsuit against the Hus for the difference in the selling price.
    • The Ontario Superior Court of Justice found in favour of the Gamoffs.
    • The court ordered the Hus to pay the difference between their initial offer and the subsequent selling price, which amounted to $470,000.

This case underscores the legal obligations of real estate agreements and the potential financial repercussions for buyers who do not follow through on their commitments. It’s a cautionary tale that underlines the necessity of understanding one’s financial position and securing necessary funds before entering into binding real estate contracts.

In Ontario’s dynamic real estate landscape, the intricacies of contractual obligations and potential breaches are often under judicial scrutiny. One such case is Deco Homes (Richmond Hill) Inc. v. Serikov, presented before the Ontario Superior Court of Justice in 2021.

Case Background

The plaintiff, Deco Homes (Richmond Hill) Inc., is a home builder and developer. The defendants, Anton Serikov and Viktoriia Nagiieva entered into an agreement to purchase a residential property from Deco Homes. However, the defendants could not complete the purchase due to unforeseen financial constraints, leading to a legal dispute.

The primary issue in contention was the backing out from an Agreement of Purchase and Sale (APS) and the subsequent consequences.

Key Facts:

  1. The Purchase Agreement: On June 25, 2017, Mr. Serikov signed an APS for a residential townhouse in Deco Homes’ Richlands project in Richmond Hill. The agreed purchase price was $1,248,380 plus upgrades. Mr. Serikov promptly paid the required deposits.
  2. Change in Closing Date: Initially set for January 15, 2019, Deco Homes shifted the closing date to March 15, 2019.
  3. Financial Constraints: As the closing date neared, Mr. Serikov realized that the property’s appraisal by the bank was $300,000 less than the agreed purchase price. This discrepancy led to a shortfall in the required mortgage amount. Deco Homes agreed to take back a $150,000 mortgage to find a solution. Despite this, the defendants failed to secure the needed funds.
  4. Failed Transaction: Due to the inability to complete the financial requirements, the property transaction did not close.
  5. Subsequent Sale: Deco Homes later sold the property on February 15, 2020, for $980,880, which was significantly lower than the original agreed-upon price with the defendants.

Deco Homes initiated legal proceedings, seeking either specific performance or, alternatively, damages. The primary damages claim was broken down as follows:

  • Difference in Sale Prices: $268,415.30
  • Accrued Expenses: Including hydro, water, gas, property taxes, snow removal, and grass maintenance, among others.
  • Interest on CIBC Loan: Initially claimed but not awarded as it lacked direct linkage to the property.

The defendants’ primary defence hinged on mitigating damages, suggesting that Deco Homes did not take reasonable steps to minimize losses. However, the court pointed out that the onus was on the defendants to prove any failure to mitigate on the plaintiff’s part.

The Court’s Decision

Justice Perell, in his judgment, pointed out the recurring nature of such cases where property transactions fail due to market fluctuations and financing challenges. He highlighted the binding nature of the APS and the obligations both parties undertake when entering such agreements.

The court sided with Deco Homes, upholding the sanctity of the APS. It ruled that the defendants’ inability to close the transaction, despite the efforts made by Deco Homes, warranted compensation for the losses incurred. The judgment awarded Deco Homes $154,164.26 plus post-judgment interest and costs.

Key Takeaways

The Deco Homes v. Serikov case underscores the importance of understanding and upholding the terms and conditions of real estate agreements in Ontario. It serves as a cautionary tale for buyers and sellers, emphasizing the legal implications and potential financial consequences of retracting from binding agreements. The ruling reaffirms the commitment of the Ontario courts to uphold the integrity of contractual obligations, ensuring that parties bear the consequences of their decisions.

Are There Legitimate Exit Strategies?

There may be legitimate exit strategies depending on the nature of the Agreement of Purchase and Sale (APS). The APS is a crucial document in Ontario’s real estate arena, creating a legally binding contract between a buyer and seller. Although the agreement contains various provisions and conditions, certain clauses allow parties to withdraw from the transaction without facing any adverse consequences.

Conditions: The Built-in Exit Routes

Typically, pre-defined conditions within the APS must be met for a real estate transaction to close successfully. These are essentially stipulations that allow either party to back out of the agreement under specific circumstances:

  • Home Inspection: A commonly included contingency revolves around home inspections. If, for instance, an inspection reveals foundational issues or other significant problems not previously disclosed or known, the buyer might have the right to withdraw from the purchase without penalty or renegotiate the terms based on the findings.
  • Financing Condition: Many APS agreements are conditional upon the buyer securing the necessary financing. If a bank or lender denies the mortgage application or offers a loan amount less than needed, and the buyer can’t source alternative funds, this condition allows them to retract their offer without financial repercussions.
  • Sale of Existing Property: Some buyers may include a clause that makes their new property purchase contingent on the successful sale of their current home. They can withdraw from the new purchase if they fail to find a buyer within a specified timeframe.

External Factors: Unforeseen Circumstances and Deal Breakers

Sometimes, events and discoveries outside the typical conditions can jeopardize a transaction:

  • Undisclosed Liens: A title search might reveal liens against the property—perhaps unpaid taxes or contractor fees. Such liens can stall the transaction process. The buyer typically has the right to exit the agreement unless they are resolved.
  • Significant Property Damage: If, after signing the APS and before closing, the property suffers substantial damage, say from natural disasters or incidents like fire, the buyer might have grounds to terminate the agreement, especially if the damage alters the value or desirability of the property.
  • Seller Misrepresentation: If it’s discovered that the seller knowingly provided false information or deliberately concealed significant defects about the property, the buyer may have a legitimate cause to nullify the contract. However, this can be challenging as the buyer needs to offer tangible proof of the misrepresentation, and legal proceedings can be protracted and expensive.

How to avoid the risks of backing out at closing?

If market dynamics shift and property values decline, your property might not achieve its anticipated appraisal, leaving the buyer to bridge the valuation gap. By selling your existing property first, you’ll have a clearer picture of your budget for your subsequent home. The financial dynamics can be more unpredictable if you purchase before selling. Also, consider securing a mortgage pre-approval. This will assist you in incorporating the most suitable terms into your Agreement of Purchase and Sale before finalizing it.

By seeking legal guidance, you can take steps to safeguard yourself in such situations. Before finalizing an Agreement of Purchase and Sale, discuss with your lawyer to identify any protective clauses that might benefit you as the purchaser. Incorporating appropriate terms in the agreement is the most effective strategy to shield yourself from prevalent challenges faced by home buyers.

The information provided above is of a general nature and should not be considered legal advice. Every transaction or circumstance is unique, and obtaining specific legal advice is necessary to address your particular requirements. Therefore, if you have any legal questions, it is recommended that you consult with a lawyer.

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