From Breach to Lawsuit: How Real Estate Disputes Escalate After Failed Closings

When a real estate deal collapses, most people assume the biggest consequence is a lost opportunity. But in reality, a failed closing can quickly evolve into a full-scale legal dispute—one involving deposit claims, damage calculations, and potential litigation. In Ontario, the escalation from breach to lawsuit follows a pattern we see often at ME Law. Here’s how the process unfolds—and why early legal action can make a significant difference.

Step 1: The Agreement Breaks Down

It starts with a missed obligation—often at or just before closing:

• The buyer fails to provide funds
• The seller doesn’t deliver clear title or vacant possession
• One party walks away after conditions have been waived
• Delays or miscommunication trigger termination

Once a party fails to meet their contractual obligations under the Agreement of Purchase and Sale (APS), the deal enters breach territory.

Step 2: Deposit Disputes Begin

Immediately, the deposit becomes the focal point. But because it’s held in trust, neither side can access it without the other’s consent or a court order. This often leads to one party refusing to sign the release, triggering a standoff. Some sellers try to keep the deposit as liquidated damages. Buyers may argue they had valid reasons for not closing—and seek its return. This impasse is where litigation often begins.

Step 3: Legal Letters and Threats of Action

At this stage, lawyers exchange demand letters. One side may:

• Demand the deposit and additional compensation
• Accuse the other of breach
• Request that the property be resold and losses reimbursed
• Threaten or initiate a statement of claim

Sometimes, these exchanges resolve the dispute through negotiation. But when both parties stand firm, the matter moves toward litigation.

Step 4: The Lawsuit is Filed

The party claiming damages (often the seller) files a lawsuit in Small Claims Court (if under $35,000) or Superior Court for higher amounts. They may claim:

• Loss of market value (if the property sold later for less)
• Additional carrying costs, legal fees, or mortgage interest
• Emotional or reputational damage in limited cases

The defence may argue that the seller failed to mitigate losses or that the breach wasn’t material.

Step 5: Court Determines Liability and Remedies

Real estate litigation hinges on:

• The wording of the APS
• Whether contractual conditions were met or waived
• The timing and nature of the breach
• Efforts to mitigate damages

The outcome can include forfeiture or return of the deposit, a damages award, or—in rare cases—an order for specific performance, forcing the sale to proceed.

Final Thought

A failed closing isn’t the end of the story—it’s often the beginning of a legal process that can last months or years. Understanding how disputes escalate from breach to lawsuit is key to protecting your rights, minimizing financial losses, and responding strategically. In real estate, it’s not just about closing the deal. It’s about being prepared in case it doesn’t.