What happens if a Buyer cannot, or will not, close?
It is no secret that the passing of the Ontario Fair Housing Plan and the introduction of the 15% Foreign Buyer’s tax has, for now, affected some sales and property values. Because it was introduced so quickly, some buyers are attempting to get out of a contract or reduce the purchase price on the basis that the price paid for the home is “too high”. Buyers may not want to pay the “higher” price, may be unable sell their own house at an expected price, or cannot Finance because the purchased property does not appraise for the contract purchase price. This represents a difficult challenge for all parties involved and it is important to understand the law in these situations. This issue of Title Tips will outline the law and provide some tips on what to do in these circumstances.
First- The Law
On a firm agreement of purchase and sale, buyers are not entitled to a reduction of the purchase price because they could not sell their home, because the market changes or because they could not get the financing they expected. While this may seem obvious, it is surprising how many buyers believe that these reasons allow them a lower purchase price. A firm agreement of purchase and sale is a binding contract which each side is expected to fulfill on its terms, the most essential of which is perhaps the purchase price.
When a buyer cannot or does not complete an agreement without cause the buyer will be responsible for making the seller “whole”. This means that the seller is entitled to be put in the same position as the seller would have been had the buyer completed the transaction as scheduled. The buyer is liable to the seller for the difference between the original contract price and the price that the seller ultimately sells the home for, or, if the seller does not sell the home, the market value of the home at the time of the breach of the agreement by the buyer, plus any related costs incurred by the seller, such as legal, carrying, moving or accommodation costs etc.. The seller’s damages must be reasonable and foreseeable and the seller has an obligation to mitigate the amount of damages suffered, but the buyer is responsible for paying the seller these damages. A recent B.C. case, where the law is largely the same as it is in Ontario, confirms this.
Second-What Happens to the Deposit?
Contrary to what some buyers believe, buyers are not entitled to a return of their deposit, nor is their liability limited to the amount of the deposit. In general, as long as the deposit is not out of all proportion to the damages suffered, and the forfeiture of the deposit is not unconscionable, the seller is entitled to the deposit. This would be even if there were no damages suffered by the seller. If damages are suffered the seller is entitled to all of the damages as noted above and the deposit would be applied as part of those damages. Unfortunately for the seller, the seller will not automatically be entitled to payment from the Broker holding the deposit. The Broker can only payout the deposit on the mutual direction of the seller and the buyer, or by court order. This means a buyer who fails to complete a transaction has some leverage because the buyer can refuse to direct the release of the deposit by the Broker and force the seller through the expense and time of going to Court for an order compelling payment of the deposit. However, the seller does not have to wait for a Mutual Release to re-list the property and in fact may be obliged to do so in order to mitigate, or lower, the damages.
Third-Tips to Get the Deal Closed
While it is true that some buyers cannot close because of difficulties with financing, many buyers simply want a reduction of the purchase price or do not want to pay added expenses associated with financing a home that has perhaps dropped in value. This means that many buyers can be encouraged to complete the transaction. Here are our Tips to make sure that the buyer does everything possible to complete the transaction.
- Make sure the buyer understands the liability for the deficiency on resale. This can be as simple as sending the agent the Article above or having the lawyer for the seller write a letter to the lawyer for the buyer. The buyer should be made aware as soon as possible that the seller will not simply reduce the purchase price.
- Where a property is over $1 million the buyer would have had to have at least a 20% down payment to complete the purchase. The buyer should be made aware that the seller knows that the buyer can be expected to have at least 20% of the purchase price to satisfy the seller’s claim or judgment for damages. If the property is less than $1 million you should get details of the buyer’s financing as a condition of considering any extension or abatement. Then, you can apply the same logic above to the buyer’s request for reduction of the purchase price.
- If the buyer owns a property, the lawyer for the seller should immediately conduct a title search of the property owned by the buyer and determine the face value of any mortgage on title. This will allow the lawyer for the seller to put the lawyer for the buyer on notice that the seller is aware that the buyer has equity in a property which will be subject to the seller’s claim for damages. The lawyer should also search to see if the buyer owns any other properties for the same reasons.
- Consider allowing the buyer more time to close. This will generally require that the buyer pay a further non-refundable deposit and pay the seller’s associated expenses.
- Consider ways in which the seller might be able to assist the buyer in completing the transaction such as providing the buyer with a Vendor Take Back Mortgage for the buyer’s claimed shortage. This will often be less difficult than suing a defaulting buyer and gives the seller security on title for the loan. In the event that the market price comes back the buyer can later refinance the property and payout the seller.
- Consider whether there may be other means to help the buyer with financing. We recently had a transaction where the father of the seller agreed to give the buyer a second mortgage on the property for one year in order to facilitate closing.
- The buyer should be encouraged to consider getting help from family or friends rather than face a lawsuit for damages.
- After the matters above have been made clear, and the buyer still does not or cannot close, the seller should consider whether it is still better to reduce the price somewhat and close the deal rather than face the prospect of relisting and having to take legal action at a later time.
Once the buyer is fully aware of the potential liability, the buyer will be in the most motivated position to complete the transaction. It is our experience that when we push back on requests for a reduction in the purchase price most buyers are finding a way to close. In general, we would recommend that it be made clear that the buyer will be held responsible for all damages if the buyer does not close. If, after that, the buyer cannot or will not close the seller may wish to consider whether it may be worthwhile to reduce the price and close rather than re-list and have to proceed with legal action. Every circumstance is different and should be considered clearly and carefully with the buyer’s agent and lawyer.