Pre-Construction Default: The Cost Is Far More Than Your Deposit

Navigating today‘s shifting real estate market, some pre-construction condominium purchasers are grappling with unforeseen challenges: rising interest rates, tighter lending criteria, and, significantly, lower appraisal values at occupancy. In the face of these pressures, a common, yet dangerous, misconception emerges: “What if I just walk away and forfeit my deposit?”

At Zinati Kay, we cannot stress this enough: simply abandoning your pre-construction purchase and “eating” your deposit is rarely, if ever, your sole financial consequence. The reality is far more complex and costly.

Why Builders Don’t Just “Let You Walk”

In previous markets builders might have let you just walk away from the deal , probably because the price of the property has gone up from the time that you purchased it. However, this market is different. Builders have inventory which they are not selling . The price of the unit has probably dropped in the builder cannot get as much as you agree to pay for it . It no longer pays for the builder to let you  walk away. Before they could actually make money when this happened. But now it definitely costs them. From a builder’s perspective, allowing a buyer to default without consequence is simply not an option. Developers operate on tight financial margins, with significant bank financing to repay and trades to compensate. Faced with current market conditions (such as increased inventory in the GTA), absorbing substantial losses from defaulting buyers is not sustainable. Pursuing legal action is often a calculated business decision, essential for maintaining financial stability and deterring other buyers from similar defaults.

The True Cost of Default: Beyond Your Deposit

When you sign an Agreement of Purchase and Sale for a pre-construction condominium, you are entering into a legally binding contract. Unlike some resale transactions, these agreements typically become firm and unconditional once any initial review periods expire. If you fail to close the transaction on the scheduled closing date, you are in fundamental breach of that contract.

Here’s what truly happens:

1. Forfeiture of Deposits: Yes, your initial deposits to the builder will be immediately forfeited. This is the first, but often smallest, part of the financial blow.
2. Liability for the Price Gap (Damages): This is where the true financial devastation can occur. The builder has a legal right to sue you for the difference between your agreed-upon purchase price and the lower price they ultimately achieve when they resell the unit. In a softening market, this “price gap” can easily amount to hundreds of thousands of dollars. Courts consistently award these damages to builders, provided the builder has acted reasonably in attempting to mitigate their losses (e.g., promptly re-listing the unit).
3. Ancillary Costs: On top of the price gap, courts often award the builder other costs incurred due to your default, including:
   • Real estate commissions for the resale.
   • Legal fees associated with the lawsuit.
   • Daily carrying costs (e.g., property taxes, utilities, mortgage interest on their construction loan) for the period the unit sat vacant or until it resold. These “extras” can easily add tens of thousands of dollars to your total liability.
4. Credit Score Devastation: A court judgment against you remains on your credit bureau for six to seven years. This can severely impair your ability to secure future loans, mortgages, or even lines of credit, and will almost certainly result in significantly higher interest rates if you do qualify.

Ontario Courts: Consistent Precedent :The law is pretty clear

Ontario courts have established a clear legal precedent that protects sellers (builders) who have acted reasonably to mitigate their losses following a buyer’s default. Unfortunately, market realities, difficulties with financing, drops in prices, etc. will not matter , as sympathetic as a judge may be to your particular circumstance. Recent cases continue to demonstrate this pattern: buyers lose their deposits, and significant damage awards follow.

Once a judgment is issued, enforcement can be swift and impactful, including:

• Recording liens against any other real estate you own.
• Garnishing wages or bank accounts until the debt is satisfied.
• Writs of Execution can be  filed against you
  

Strategic Alternatives: Working Towards a Better Outcome

At Zinati Kay, we believe that simply walking away is almost always the costliest option. Our experienced real estate lawyers focus on exploring and negotiating strategic alternatives with the builder to mitigate your losses and protect your financial future. While builder cooperation is essential, a proactive and professional approach often yields a far better outcome than default.

Here are potential strategies we can explore on your behalf:

1. Closing Date Extension: If your mortgage funding is merely delayed or requires more time to resolve (e.g., securing alternative financing), we can negotiate an extension to your closing date. Builders typically charge a daily fee for such extensions, but this cost is usually far less than litigation and buys you crucial time. 
2. Assignment Sale: If a suitable assignee (new buyer) can be found, and we can obtain the builder’s consent , we can facilitate the assignment sale. This will usually involve a fee but is often better than a full breach of the agreement of purchase and sale and other losses When executed properly, an assignment transfers the original buyer’s rights and obligations to the new buyer, potentially allowing you to exit the deal and recoup some, or all, of your initial deposit. 
3. Alternative Financing: Seeking alternate financing through secondary lenders as a way to complete the transaction.
4. Mutual Termination with or without Partial Deposit Retention: In some cases, we can negotiate a “clean break” where the builder agrees to release you from the contract in exchange for retaining a portion of your deposit, allowing you to walk away with the remaining funds and no further liability. This avoids costly and lengthy litigation.

Our Essential Advice: Don’t Wait – Act fast, act Early

The moment you anticipate difficulty closing your pre-construction purchase, it is imperative to contact a qualified real estate lawyer. Waiting only shrinks your options and increases your potential liability. Our team can review your specific Agreement of Purchase and Sale, assess your situation, and negotiate with the builder’s legal counsel on your behalf.

At Zinati Kay, we have extensive experience navigating complex pre-construction issues. We offer flat-fee services to review your contract and engage in negotiations with builders to help you achieve the best possible outcome.

Contact Zinati Kay today for a confidential consultation. Protect your financial future by understanding your options and acting strategically.

Disclaimer: This article provides general information only and is not legal advice. Consult a qualified real estate lawyer at Zinati Kay about your specific situation to understand your rights and obligations.