A real estate transaction can collapse for many reasons – for example, a default by a buyer or a seller, or an event unforeseen by either party. In this post, we’ll review the remedies available to a buyer in a scenario where the seller does not complete the transaction.
A seller of a residential or commercial real estate property can be in default if one of the following happens:
- the seller is unable or unwilling to sell the property under the contract (for example, the seller now wishes to sell the property to someone else for a higher price);
- the seller cannot comply with one of the material terms of the contract (for example, the seller cannot deliver vacant possession of the property or discharge a material charge from the title on the closing date); or
- the seller misrepresents a fact that comprises a warranty or representation under the contract of purchase and sale.
When a breach is minor or not material, the buyer is expected to complete the purchase, and sue for any resulting damages. However, if a breach is significant or material, the buyer may have a choice of remedies.
In addition, the seller’s breach can be actual (for example, failure to close on the closing date) or anticipatory (for example, the seller communicating prior to the closing date that it will not transfer the property on closing). Both types of breaches, actual and anticipatory, provide the buyer with the following options:
- terminate the contract and seek the return of deposit and, if applicable, further damages; or
- in limited circumstances, affirm the contract and seek to compel the seller to transfer the property in accordance with the terms of the original contract (this is called “specific performance”).
Return of Deposit
In the event of a seller’s breach, the buyer is entitled to the return of the deposit. If the seller does not voluntarily pay back the deposit, the buyer may need to pursue a legal action for the return of the deposit. It is important to review the contract of purchase and sale as it may provide for specific procedure to follow in order for the deposit to be released.
Claim for Damages
A claim for damages arising from a breach of contract aims to put the innocent party in the position he or she would have been in had the contract been performed.
If the buyer incurs further damages in purchasing a replacement property, the buyer can pursue the seller for such additional damages. The buyer has a duty to mitigate, or minimize, his or her damages arising from the seller’s breach. If the buyer purchases a replacement property, and it can only be purchased for a higher value than the purchase price of the original transaction, the buyer can seek to recover the difference in the purchase price from the seller by way of damages. In addition, the buyer might be able to recover from the seller additional costs such as rental costs paid while searching for a replacement property, additional mortgage costs and other related fees.
In certain circumstances, instead of seeking the return of a deposit and damages, the buyer may wish to compel the seller to transfer the property in accordance with the terms of the original contract (this is called “specific performance”).
If a buyer chooses to seek specific performance of a real estate contract, the buyer should ensure that he or she is “ready, willing and able” to close the transaction on the closing day. In practical terms, this usually requires the buyer’s lawyer or a notary to deliver (or “tender”) all required closing documents and the required funds to the seller on the closing date. If the buyer cannot show that it was “ready, willing and able” to complete the purchase on the closing date, it will not be entitled to specific performance.
In addition, the court will usually not grant an order for specific performance unless the buyer can show that the subject property is uniquely suited to his or her needs such that an alternative substitute property is not readily available, and therefore an award of damages will not be sufficient [Semelhago v. Parmadevan, 1996 CanLII 209 (S.C.C.)]. For example, purchasing a lot located in the middle of two others already secured for a land assembly for the purposes of constructing a larger building would entitle the plaintiff to an order of specific performance [Pennyfarthing Construction Co. Ltd. v. Li, 2016 BCSC 1959]. On the other hand, a developer purchasing land for development for the general purpose of making a profit would typically not be entitled to specific performance and would be limited to a claim for damages [for example, Earthworks 2000 Design Group Inc. v. Spectacular Investments (Canada) Inc., 2005 BCSC 22].
In order to ensure that the seller does not sell the property the buyer is looking to purchase, the buyer should also file a certificate of pending litigation (CPL) against the title of the property. The CPL provides third parties with notice of litigation involving the property, and will ensure that the seller is not able to transfer it pending resolution of the buyer’s specific performance claim.
Damages in Lieu of Specific Performance
Occasionally, although the buyer is found to be entitled to specific performance, such an order would not be practically available (for example, the property was irreparably damaged or the buyer can no longer purchase due to circumstances beyond his control). In such circumstances, the court may award to the buyer damages in lieu of specific performance. These damages can be different from those claimed above under the general contract claim, and will be based on the value of the property the buyer originally agreed to purchase.
In a situation where a seller breaches or threatens to breach a contract of purchase and sale, it is critical to review the contract for all relevant terms and limitations. Contracts often set out certain steps to follow to claim a specific remedy (such as to forfeit a deposit), or may limit typical remedies available upon happening of certain events.
In addition, a buyer dealing with a seller’s default should seek legal advice early in the process, to ensure that the buyer does not take steps that are inconsistent with the position he or she ultimately wishes to take, and does not limit their recourse to remedies otherwise available to them.
If you are dealing with a collapsing real estate transaction, or have questions about your rights and responsibilities in an ongoing transaction, please reach out to our lawyers and we will be happy to help.