In Toronto and across Canada, buyers and sellers are legally required to act with honesty and good faith in real estate transactions. In 2014, the Supreme Court of Canada recognized a new duty of honest contractual performance, meaning that parties must not lie or knowingly mislead each other about matters directly related to the contract’s performance. In practice, this duty of honesty is part of a broader principle of good faith that now underpins all contracts. Before a deal is signed, each side can pursue their own interests, but once a purchase agreement is signed, both parties must perform their obligations in good faith and in an honest manner.
Good faith in this context means carrying out the contract fairly and cooperatively, without trying to undermine the deal. Importantly, acting in good faith does not require you to sacrifice your own interests or divulge every detail to the other side – the Supreme Court made clear that this duty does not create any new “duty of disclosure” or fiduciary obligation beyond honesty. It simply means you must genuinely attempt to fulfill your contractual promises and refrain from deception or bad motives. In short, don’t lie, don’t mislead, and don’t sabotage the agreement.
Good Faith Obligations for Buyers
Home buyers have a duty to be truthful and diligent in fulfilling conditions of the sale. When a buyer’s offer is accepted with conditions (for financing, inspection, sale of the buyer’s current home, etc.), the buyer must make reasonable efforts to satisfy those conditions. For example, if the agreement is conditional on financing, the buyer should promptly apply for a mortgage; if there’s an inspection condition, the buyer should schedule the inspection in good time.
A buyer cannot simply do nothing and then cancel the deal at the last minute – that would be bad faith. In one case, a buyer knew about certain repair issues but waited until the eve of closing to raise them as a pretext to back out; the court found this behavior was in “bad faith”. The buyer had not acted honestly or fairly, because the problem was known early and the timing left no chance for the seller to address it.
Under the duty of honesty, a buyer cannot terminate a purchase for some secret, ulterior reason that isn’t part of the contract. You are only entitled to cancel a deal if a valid contract condition (like financing or inspection) isn’t met despite your genuine efforts. In other words, you can’t back out due to mere buyer’s remorse or an undisclosed issue that wasn’t covered by a condition. If your situation changes (for example, you suddenly doubt the purchase or your finances take a turn), you remain bound by the agreement unless you negotiated a specific escape clause.
Some buyers choose to negotiate a condition allowing them to cancel for any reason (such as needing to sell their current home first), but sellers are often reluctant to accept such open-ended conditions. The bottom line is that as a buyer you should enter the contract with honest intentions to complete it – if you change your mind without a contractual basis, you risk breaching the duty of good faith. A buyer who walks away unjustifiably may forfeit their deposit and face legal action from the seller.
Good Faith Obligations for Sellers
Home sellers also must conduct themselves honestly and reasonably throughout the transaction. Once you’ve signed a purchase and sale agreement, you are expected to cooperate so the buyer can fulfill their side of the bargain. The seller should not hinder or interfere with the buyer’s efforts to complete due diligence. For instance, it would be bad faith for a seller to refuse access for the home inspection or appraisal, since those are necessary steps for the buyer to close. Similarly, if the buyer needs certain documents (like an existing survey or permits), the seller should provide them as agreed. Acting “capriciously or arbitrarily” – such as suddenly pulling the property off the market without cause or trying to cancel the deal for a trivial reason – would violate the duty of good faith.
Sellers should also use good faith when enforcing contract terms. You cannot seize on a technicality that you yourself caused or already waived in order to escape the deal at the last moment.
A recent Ontario case illustrates this point:
The sellers delayed giving the buyers details needed to pay the deposit, then accepted the deposit a bit late, but on the eve of closing one seller tried to cancel the deal citing the late deposit. The court had “no hesitation” in rejecting that move – by delaying and then accepting the deposit, the seller made strict compliance impossible and waived the deadline, so trying to terminate was completely unreasonable and in bad faith.
The court ordered the seller to complete the sale (specific performance was granted due to the property’s uniqueness) and criticized the seller’s last-minute surprise notice as not acting in good faith. The lesson for sellers is to be upfront and timely if an issue arises. If you believe the buyer breached the agreement, give prompt written notice and an opportunity to correct it – failing to do so can itself be seen as bad faith. Once you’ve accepted an offer, you should honor it in spirit and not look for loopholes to unfairly cancel. If market conditions change or you get a higher offer later, you still have an obligation to proceed in good faith with the original buyer. A seller who unjustifiably reneges on a deal can be taken to court and possibly compelled to complete the sale or pay damages for the buyer’s losses.
Honesty and Good Faith for Real Estate Agents
Licensed real estate agents in Ontario are held to high professional standards of honesty and good faith. Under Ontario’s Code of Ethics, **every agent must act with courtesy, honesty, good faith, and integrity toward all parties in a transaction. This means an agent cannot mislead any buyer, seller, or other party, even while the agent works to protect their client’s best interests. **Honesty for agents goes beyond avoiding outright lies – it also means being candid and not withholding material information. Agents must remain vigilant against various types of real estate fraud, such as misrepresentation of property features or failing to disclose known defects. By adhering to ethical guidelines, agents not only protect their clients but also help maintain the integrity of the real estate profession as a whole. Ultimately, fostering trust and transparency is essential for successful and fair transactions in the real estate market.
For example, if a seller’s agent is aware of a major defect or an encroachment affecting the property, they should encourage the seller to disclose it, or the agent risk violating their obligation to deal fairly and truthfully. Agents are also expected to act in good faith by being reasonable and avoiding “abusive or arbitrary” behavior in their dealings. In practice, a good agent facilitates the transaction rather than sabotaging it.
From a practical standpoint, agents can help ensure honest, good-faith dealings by following some best practices. Verify critical information instead of taking everything at face value. For instance, a buyer’s agent should double-check details about a property (permits, zoning, etc.) and not simply rely on the seller’s word if something seems off. Additionally, agents should conduct thorough market analysis to ensure that the price being offered aligns with current market conditions, as this knowledge can greatly influence a buyer’s decision. Understanding the concept of NOI and its effect on profitability can also help agents guide their clients in making informed investment choices, particularly when evaluating rental properties. By utilizing these strategies, agents can foster stronger relationships built on trust and transparency.
An agent should also put all important promises and terms in writing in the Agreement of Purchase and Sale. Verbal assurances or side deals often lead to misunderstandings – if it’s not in writing, it’s not legally binding. By documenting everything clearly and advising their clients to meet all deadlines and duties, agents help both sides uphold their good faith obligations. In short, the role of the realtor is to be a trusted professional who balances advocacy for their client with a duty of honesty to everyone involved. This ethical standard is crucial for maintaining trust in the real estate market. Additionally, agents should ensure that their clients understand essential real estate terminology to avoid confusion and enhance communication. By providing clear explanations and guidance, realtors can empower their clients to make informed decisions throughout the transaction process. This knowledge not only benefits individual clients but also contributes to a more transparent and trustworthy real estate environment overall.
Consequences of Bad Faith in Real Estate Deals
Failing to meet the duty of honesty and good faith can lead to serious legal and financial consequences. If a party is found to have acted in bad faith – for example, by concealing facts, dragging their feet intentionally, or unjustifiably backing out of the deal – the other party can pursue a breach of contract claim in court. Judges in Ontario have shown little sympathy for blatantly unreasonable or deceptive conduct. A breaching seller can be ordered to complete the sale (specific performance) if the property is unique, or to pay substantial damages to the disappointed buyer. A breaching buyer can likewise be held liable for the seller’s losses (for instance, if the home later sells for less) and will likely lose their deposit as well.
Moreover, if one party lied or fraudulently misled the other, they could face additional claims for misrepresentation, potentially owing extra damages for the harm caused. Litigation stemming from bad faith conduct is expensive, time-consuming, and stressful for everyone involved. In the end, nobody wins when a real estate deal collapses due to dishonesty.
The wiser course is to stay transparent and cooperative: if problems arise, communicate and try to resolve them. Canadian courts encourage this approach – remembering that the “duty to act in good faith” essentially means each party must use reasonable efforts to fulfill their part of the contract and not sabotage the deal’s purpose. By staying true to that principle, buyers and sellers can avoid legal pitfalls and ensure smoother closings.