Tag: Reason Real Estate Deals Fall Through

The Agreement of Purchase and Sale (APS) has been signed and any conditions waived or fulfilled. All that remains is for the closing itself to take place. What happens when a party to a firm APS fails to close the deal? This may happen, for example, if the buyers find out that they are unable to obtain financing for the property, as was common around the Greater Toronto Area (GTA) two years ago during the market correction. The answer will obviously depend on the particular circumstances, however case law provides us with some generalizations:

1) SELLER FAILS TO CLOSE

If the buyer is ready to close, and for whatever reason the seller has a last minute change of mind and refuses to close, the buyer may be entitled to damages and/or specific performance forcing the seller to close.  In Semelhago v Paramadevan [1996] 2 SCR 415, the Supreme Court of Canada held that whether or not a buyer is entitled to specific performance depends on how “unique” the property in question is. Courts will take into account both objective and subjective factors when determining whether the test for uniqueness is met (see, for example, Marvost v Stokes, 2011 ONSC 4827, aff’d 2012 ONCA 74).

2) BUYER FAILS TO CLOSE

This was a common situation following the market correction in areas around the GTA that resulted from the introduction of Ontario’s Fair Housing Plan (Ontario Ministry of Finance, 20 April 2017).  Unless the seller can sell the property for an amount greater or equal to what the buyer had agreed to pay, the seller will be entitled to damages, amounting to the difference between the agreed upon price for the property in the failed APS and the amount that the seller ultimately sold the property for.

3) REALTOR LIABILITY

Occasionally we are asked whether a realtor can be held liable for a failed APS, particularly if, for example, a realtor did not advise an inexperienced buyer to make an offer conditional on financing. Case law on this topic is somewhat mixed. There is a line of cases in which buyers were successful in third party claims against realtors who failed to advise the buyers about the risks of not making their offers conditional on financing or another event taking place, such as a satisfactory home inspection (see, for example, Krawchuk v Scherbak, 2011 ONCA 352 and Pitter v Ha, 2005  CarswellOnt 10310 (Sup Ct J), aff’d 2007 CarswellOnt 4271 (Sup Ct J (Div Ct)). On the other hand, there are cases in which courts have determined that the parties to an APS were experienced in trading in real estate and should have been aware of the risks of making an unconditional offer to purchase a property, and therefore third party claims against the realtors did not succeed (see, for example, Shields v Broderick, 1984 CarswellOnt 1251 (H Ct J).

4) RETURN OF DEPOSIT

One final item to consider regarding a failed APS is what happens with the buyer’s deposit. A deposit will only be refunded if the buyer and seller agree to execute a mutual release or if one of the parties obtains a court order.

If you have further questions about failed real Agreements of Purchase and Sale and your legal rights, please contact Christopher Statham at Christopher.statham@devrylaw.ca or 416.446.5839

“This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.”

You’ve just signed an agreement of purchase and sale, and you’ve discovered that drugs were illegally manufactured on the property years before the seller bought it. Can you get your deposit back?

A recent Ontario Court of Appeal decision dealing with an “Illegal Substances Clause” in an Agreement of Purchase and Sale (“APS”) says: ‘it depends.’

ILLEGAL SUBSTANCES CLAUSES

In Beatty v Wei 2018 ONCA 479, the parties had entered into a standard form APS under which the purchaser agreed to purchase a residential property in Scarborough for the purchase price of $916,000. The Purchaser submitted a deposit of $30,000.

The purchaser discovered prior to closing that the property has been used as an illegal marijuana grow-op before the sellers had acquired it. The purchaser stated he was entitled to terminate the agreement prior to closing and get his deposit back; the sellers disagreed. Instead, they sued the purchaser claiming forfeiture of the deposit to them, and damages for any loss they might suffer as a result of the delayed re-sale of the property.

The main analysis centred around the Illegal Substances Clause, which stated, in part (emphasis added):

The Seller represents and warrants that during the time the Seller has owned the property, the use of the property and the buildings and structures thereon has not been for the growth or manufacture of any illegal substances, and that to the best of the Seller’s knowledge and belief, the use of the property and the buildings and structures thereon has never been for the growth or manufacture of illegal substances…

Upon interpretation of the Illegal Substances Clause, the court found that the Sellers’ representation and warranty that the use of the property had never been for the manufacture of illegal substances was limited to their knowledge as it existed when they executed the APS. Since the seller did not know at the time of executing the APS that their house was formerly a grow-op, the court found for the sellers rather than the purchaser.

In essence, the Court of Appeal concluded the sellers had to know at the date the APS was signed that illegal substances were previously manufactured on the property. If the sellers found out one day later, the APS would still be valid, and it would accordingly be a breach of contract for the purchaser to terminate the agreement. Since the purchaser unilaterally terminated the APS well after both parties signed it, the purchaser was found to have breached the contract.

WHAT DOES THIS MEAN FOR ME AS A HOME PURCHASER? 

This case tells us that home purchasers should be careful to negotiate agreements of purchase and sale on terms that are favourable to them. If a significant desire of a home purchaser is to ensure their new house was never used to manufacture illicit substances, then the agreement should reflect that desire as closely as possible.

If you would like more information on how to protect yourself as a home-purchaser, please contact Jennifer Hetherington at 416-446-5838 or at jennifer.hetherington@devrylaw.ca

“This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.”