August 18, 2022

By Brian Babcock

When a real estate transaction fails to close through no fault of the buyer, they usually can expect the return of the deposit. However, when the failure to close is due to the fault of the purchaser, the basic principle is that the deposit is forfeited, without proof of any damages suffered by the vendor. The deposit is not just part payment but also a security mechanism to incentivize the purchaser to complete the transaction. Even where the vendor suffers no loss, the vendor may nevertheless retain the deposit, subject to relief from forfeiture.

THE ISSUE

When is relief from forfeiture appropriate, leading to the purchaser recovering their deposit?

THE CASE

We have written before about this topic, but with changing times, and softening real estate markets, remedies for failed transactions are a hot issue again. The Superior Court of Justice revisited the subject in Mouralian v. Grouleau. In that case, it was the purchaser suing for the return of the deposit. She argued that the defendant had sold the property for substantially more than the contract price, and that the due to the plaintiff’s personal circumstances, it would be unconscionable for the defendant to retain the deposit. The personal circumstances included the fact that the plaintiff had entered into the transaction when she was struggling with her mental health and was unable to appreciate the consequences of the agreement. She then suffered a concussion between entering into the contract and the closing date, which she says made it impossible for her to complete the deal.

THE LAW

Relief from forfeiture is an equitable remedy codified in section 98 of the Courts of Justice Act which provides that a court may grant relief against penalties and forfeitures on such terms as to compensation or otherwise as are considered just. In Ontario, the courts apply a two-part test for relief from forfeiture adapted from an earlier English case:

1.    Whether the forfeited deposit was out of all proportion to the damages suffered; and
2.    Whether it would be unconscionable for the seller to retain the deposit.

Exceptional circumstances are required for a finding of unconscionability. Indicia of unconscionability are not an enclosed list but may include:

1.    Inequality of bargaining power;
2.    A substantially unfair bargain;
3.    The relative sophistication of the parties;
4.    The existence of bona fide negotiations;
5.    The nature of the relationship between the parties;
6.    The gravity of the breach; and
7.    The conduct of the parties.

One factor that makes Mouralian an opportunity to update our understanding of relief from forfeiture is that in 2020 the Supreme Court of Canada reviewed the equitable doctrine of unconscionability and held that unconscionability requires both an inequality of bargaining power and a resulting improvident bargain. This places a renewed emphasis on the first two items on the list of indicia.

In this case, the deposit represented about 5% of the sale price, which the court found was a very typical deposit for a residential property transaction. However, given that the vendor suffered no damages and resold at a higher price which more than covered her costs of resale, the first branch of the test for relief from forfeiture was met.

It was really the second branch of the test, unconscionability, that was an issue.

For an inequality of bargaining power to exist, one party needs to be unable to adequately protect their own interests during the contract process. Inequality may exist even where there is a technically valid contract but usually the cases require that the party’s ability to negotiate or the party’s ability to understand or appreciate the meaning and significance of the contract terms is impaired.

In Mouralian, the plaintiff relied on her mental state which was impaired due to the death of an uncle to whom she was very close. She says that she was grieving at the time the real estate agent pressured her into signing an offer to purchase.

Although the plaintiff attempted to obtain medical evidence to substantiate her allegations, the two letters she obtained from a psychiatrist and a nurse practitioner were not satisfactory to the court. All the other factors suggested that the plaintiff purchaser was able to protect her interest in the contracting process. In addition, when a party relies on a lack of mental competence to escape the terms of a contract, she must not only show that she was incompetent but also that the other party knew of it and took advantage of it.

At no time during the months between signing the agreement and closing did the purchaser attempt to repudiate the contract until her financing fell through. This indicates that the problem was the lack of financing, not unconscionability or an unfair bargain.

There was no inequality of bargaining power. The court found that the purchaser would have closed the transaction if she had financing which is evidence that the bargain was not unfair. The subsequent sale for a higher price confirms that the plaintiff purchasers deal was at a fair price.

THE RESULT

As a result, the plaintiff purchaser’s claim for return of the deposit was dismissed and the judge directed that the deposit be paid out to the vendor. The judge reiterated that the deposit is not a windfall to the vendor who suffered no damages but is part of the larger real estate system within which deposits serve as security to incentivize purchasers to close the transactions into which they enter.

TAKEAWAYS

In addition to the clarifications of the process to determine whether relief from forfeiture should be granted, this case is a useful reminder that the risk of obtaining financing falls on the purchaser if there is no financing condition in the agreement of purchase and sale, or after a financing condition is waived.

In a hot market, purchasers often feel pressured to make offers with no financing condition or to waive the financing condition to firm up an offer to prevent another buyer scooping the property. If you are looking to purchase real estate, you need to be aware of that risk and be financially capable of handling it.

• 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.

If you are uncertain about what obligations the agreement of purchase and sale creates, then you should not allow yourself to be pressured into signing it without consulting the lawyer for an explanation. Although real estate agents receive training as to how to explain agreements to purchasers, they do not have the same level of expertise as lawyers. If after speaking with your realtor you still have questions, you are entitled to, and should obtain, legal advice.

WHAT WEILERS LLP CAN DO FOR YOU

If you believe that you are a party to an unconscionable contract, you should seek legal advice before acting. A lawyer will help you review the evidence and provide an objective opinion of your risks.

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, 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.