December 18, 2022
In many situations, financing a property will be difficult because the purchase price may exceed the appraised valuation upon which the mortgage is based. Unless the buyer has more cash to put in the deal, the deal falls through.
Usually, the seller is then allowed to keep the deposit and to sue for any actual damages. There are exceptions, especially where the amount of the deposit is unreasonable in relation to the value of the transaction.
In these situations, a buyer is allowed to apply to court for relief from forfeiture. Forfeiture is the loss of your deposit without a proof of any actual damages. Forfeiture is not permitted where it results in a penalty as opposed to a reasonable estimate of damages.
1854329 Ontario Inc. v. Cairo deals with an agreement of purchase and sale for a commercial building. The agreement was conditional upon financing. The buyer put down a $200,000 deposit against the $7.25 million purchase price on signing the agreement. The buyer was obligated to deposit a further $200,000 (total deposit of $400,000) once they had their financing and waived the financing condition.
The buyer received a term sheet from a bank which set out terms upon which the bank was prepared to loan the buyer $6.65 million to fund the purchase. The term sheet specifically stated that it was not a firm offer to provide financing. However, the buyer waived the financing condition, a risky move that we have warned about before.
The buyer could not come up with the money that they needed to close the deal. They asked for an extension of the transaction but did not offer any compensation to the seller for the risk, expense, or inconvenience. The seller refused the extension, chose to treat the deal at an end, then retained the deposit and sued for damages.
The seller was successful on Superior Court motion, and that decision was upheld on appeal to the Ontario Court of Appeal. The seller was entitled to be paid their actual damages, and to retain the deposit.
The reasons are familiar if you recall our earlier articles:
- The amount of deposit was not unconscionable or unfair as it represented only about 5.5% of the purchase price which was commercially reasonable and not disproportionate to the actual damages.
- There was no evidence of inequality of bargaining power or any other unfairness.
- The refusal by the seller to extend the deal was not unreasonable.
But then, as often happens, the buyer tried a different angle. The buyer tried to convince the court that the pandemic was an unforeseeable event that prevented them from getting their financing and closing the deal.
Both the motion judge and the Court of Appeal reasoned that by waiving the financing condition, the buyer assumed the risk of the transaction falling through for whatever reason. A pandemic was just one additional risk.
There were three owners of the property on the selling side. Only one of the owners had signed the agreement of purchase and sale so the buyer argued that the damages should be reduced to 1/3 of the actual damages. The courts disagreed:
- The signing party for the sellers had powers of attorney from all owners and therefore, could complete the transaction; and
- All that is necessary for a seller to be entitled to be paid the purchase price is that the seller be in a position to ensure that good title is conveyed to the purchaser, whether or not that seller is the technical holder of title.
- Even in a less than hot market, buyers often feel pressured to make offers with no financing condition or to waive the financing condition to firm up an offer and prevent another buyer scooping the property.
- This is a risky move in any market.
- If you are looking to purchase real estate, you need to be aware of that risk and be financially capable of handling it.
This is even more of a risk in a cooling market, where financing may be difficult to lock down or not available at all. We repeat our previous takeaways, which still apply:
- If you are relying on the sale of another property to finance your new purchase, you should have a backup plan in case your property does not sell in time.
- Do you have relatives, friends, or financial institutions that will provide you bridge financing?
- Can you afford to lose your deposit?
- Can you afford to be sued if the vendor suffers damage that is greater than the amount of the deposit?
- Can you afford litigation?
- Can you afford the time and stress of litigation?
In our opinion, no potential purchase is worth taking risks that you cannot afford. It is even worse to take those risks without fully understanding them. If you are at all uncertain, we recommended that you consult a lawyer before signing the agreement of purchase and sale.
WHAT WEILERS LLP CAN DO TO HELP YOU
Whether your real estate deal is residential or commercial, simple or complex, at Weilers LLP every transaction is unique and every client is important. We do our best to protect you from surprises and, when there are unexpected developments, we have the time and the expertise to help solve them.
If you believe that you are a party to a real estate deal that may not close, should seek legal advice about the consequences. A litigation lawyer will help you review the evidence and provide an objective opinion of your risks that some real estate lawyers might not be willing or able to provide.
If, despite the best efforts of your realtor, your real estate lawyer, and yourself, you find yourself facing litigation, the litigation team at Weilers LLP has the experience and knowledge to make sure that they obtain the best evidence and make the right legal arguments for your case. We know that peace of mind is important to you, and we do our best to get that for you. We also know that it doesn’t hurt to recover money for you at a reasonable cost.
If you want the personal touch on your real estate deal, contact Weilers LLP.
If your deal goes sour, and you need litigation, Weilers LLP will happily work with your real estate lawyer. We take on tough cases, so our clients have the minimal amount of stress. Let us have the sleepless nights instead of you.
We always hope everything goes smoothly, but as we like to say, “if there were never any problems, no one would need a lawyer.” When you have problems, we are here to help. Weilers LLP may be the right lawyers to save you both money and sleepless nights.