The Consequences of Failing to Close

Introduction

            When a buyer and seller of real property sign an Agreement of Purchase and Sale (APS), they are in effect signing a contract and therefore agreeing to certain contractual obligations. Essentially, by signing this document, the buyer is agreeing to purchase the real property at the stipulated price and the seller is agreeing to sell their property at such a price; and both parties are agreeing to complete this transaction by the closing date. It is important to remember that each transaction has its own unique circumstances, meaning that each APS will be different. Most offers contain a basic set of conditions, however, there are certain situations where buyer and / or seller will request specific conditions; these are contained in Schedule A to the agreement. 

When the buyer fails to close 

            If the closing date comes and the buyer cannot come up with the money to close the transaction, a common recourse would be that the buyer forfeits their deposit, the transaction is void, and the parties walk away. However, there are situations where a buyer’s failure can be very problematic for the seller. A good example would be during a falling housing market. By the time the vendor finds another buyer, the selling price may be significantly lower. Also, within that time frame, the seller would have incurred certain expenses, such as legal fees, administrative fees, and in the worst case, another mortgage. 

            Most of these lawsuits are filed using an action. However, the suing party can file an application instead. In deciding which avenue to choose, many factors are taken into account, such as the lawyers’ litigation style, the circumstances of the case, and the available evidence.

Defences – Duty to Mitigate 

            If a buyer fails to close a real estate transaction, one defence is that the seller failed to mitigate their damages. However, it is important to note that this defence requires a high standard. 

            First, the plaintiff will have to prove how they calculated their damages. This usually involves providing evidence of their legal fees, mortgage costs, staging costs, and their resale price. The burden of proof will then fall on the defendant, who must show that the plaintiff failed to make reasonable efforts to mitigate their losses. It is important to note that, as per the case law, there is no standard of perfection in regards to the plaintiff’s efforts to mitigate. Meaning that if the plaintiff showed a reasonable effort to mitigate their losses, this will usually be sufficient to defeat the defences’ argument. 

When the seller fails to close 

            If the seller is not able to close the transaction, there are two kinds of remedies the buyer can seek. The first remedy is called compensation for liquidated damages, or in other words, monetary compensation. Situations where money will be the appropriate remedy would be when the buyer had sold their previous property in anticipation of moving into their new one. If they cannot move in, they may incur hotel and other living expenses. Another situation would be in a hot market, where they buyer would be forced to pay a lot more money to find a similar property. The second remedy is called specific performance. In this case, the court will essentially order the parties to the agreement to comply with their respective obligations under the contract (the APS). In most cases, the court will order the seller to transfer title to the buyer as per the terms of the APS.

            When considering whether specific performance is an appropriate remedy, judges usually consider the following three factors. The first is the nature of the property. This matters to judges because they usually want to see if there is anything unique about the property. This can include objective things such as the property’s physical attributes or its location. However, it can also include the buyers’ subjective interest in the property. The second is the inadequacy of money as an appropriate remedy. It is important to note that sometimes it will be beneficial for the plaintiff to use this argument and sometime the plaintiff will want to avoid using it. For example, in the case of an investment property, it is hard to make an argument for specific performance because they seller can just pay the appropriate amount of money (which should resolve the issue). However, in situations where calculating the appropriate amount is too difficult, or is an unreasonable task, then there may be an argument for specific performance. The third factor is the behavior of the parties. If the seller is engaging in bad faith, there may be an argument for specific performance. 

What is the amount of damages that should be paid?

            The case of Yu v. Falkovsky (2022) highlights, among other things, a good precedent about how quantum of damages are to be calculated when a party fails to close. In this case it was reiterated that ‘the quantum of damages should be the amount required to put the plaintiffs in the position they would have been had the contract been completed’. This is usually the difference between the contracted price and the market price at the date the repudiation of the contract was accepted. In a falling market, courts usually award the seller damages equal to the difference between the contract price and the highest price the seller can obtain within a reasonable time. 

Conclusion

            Failing to close a transaction of real property in Ontario doesn’t only affect the buyer and seller; as lawyers, mortgage agents, lenders, and real estate brokers can be negatively affected. There are different legal standards and procedures used to determine the standards when a buyer fails to close as opposed to when a seller isn’t able to close. Therefore, in conclusion, parties to an agreement should always make sure they are ready to close the transaction, and if there are any doubts, conditions should be placed in Schedule A of the agreement.