What To Do When The Deal Goes Bad?

May 31, 2017

By Brian Babcock

The purchase of a new home can be one of the most exciting times in anybody’s life.

But what about when the deal fails to close?

If you are the innocent seller, you likely will either simply forfeit the deposit as liquidated damages and carry on; or remarket the property, and sue the defaulting purchaser for expenses and any lower purchase price. Though Thunder Bay’s real estate market is not as hot as the GTA, the stable or balanced market generally means that a seller can find another buyer with modest effort, and often at the same or even a better price.

It is therefore extremely rare that a seller sues for “specific performance”, the equitable remedy that requires a defaulting party to keep their side of a bargain.

Buyers on the other hand often want specific performance. At one time, in cases involving real estate, it was presumed that specific performance would be granted in most cases, because real estate, whether vacant land or land with buildings (like a house, apartments, or commercial building) was presumed to be unique. A buyer would not be expected to settle for damages when ordering the seller to complete the deal would put the buyer in exactly the position they wanted to be in.

Specific performance is not easy or simple to get.

Up until a Supreme Court of Canada decision in 1996, there was a presumption made that land (including buildings, etc.) is unique, and that therefore specific performance was the primary or presumed remedy.

The effect of that decision, and other recent cases, is that the purchaser now must prove that the property has a special and particular value to them. Without that, damages are an adequate remedy, and because damages are a simpler remedy, they make resolving a dispute more efficient.

At least three factors go into making up uniqueness:

  • the physical characteristics of the property
  • the transactional characteristics of the deal
  • the personal or subjective reasons why the purchasers desire THIS property.

Uniqueness does not means singularity- there will always be similar or comparable properties, so the test is really whether there are a number of factors which make the property particularly suitable for the Plaintiff. If so, damages are not going to be an adequate remedy.

A century-old custom home in an established neighbourhood is vastly more unique than a condominium unit or a “McMansion” in a new subdivision. Generalizing though is dangerous. One of the recent cases allowing specific performance dealt with a newer home in a newer neighbourhood. For those particular purchasers, the large, pie-shaped lot for gardening, the location of the lot close to one Plaintiff’s sister’s residence, and a public transit stop nearby (one of the Plaintiffs did not drive) were enough to make it unique. The Court of Appeal agreed, with no detailed analysis of the law, and focused on the facts.

Commercial properties are quite a different situation, as they are often more interchangeable, and if they are investment opportunities, it is presumed that damages (lost profit) are an adequate remedy. Exceptions are usually opportunities for operating a business- a hotel site with a favourable exposure to the freeway and tourist attractions; a gravel pit being sought by a company in that business.

Deciding whether or not the property is actually unique quickly is crucial for at least two reasons.

First, if the Plaintiff is the disappointed buyer, in order to prevent the seller from turning around and disposing of the property, it is essential that a Certificate of Pending Litigation is registered on title. That document warns other potential buyers that they may not receive good title if the action for specific performance succeeds.

The risk to the Plaintiff is that if the action fails, the Plaintiff may have to pay the Defendant seller’s losses caused by preventing the seller from finding a fresh deal.

Second, as mentioned briefly in my recent article on mitigation, if there is only a claim for damages, the Plaintiff is expected to mitigate their damages by finding a replacement property quickly. To illustrate, assume on the closing date, the house was worth $500,000.00. After the breach by the vendor, the buyer could find a replacement at a cost of $600,000.00. Damages would be $100,000.00. However, two years later when the trial arrives, and the judge finds that the property is not unique, the replacement house costs $700,000.00. If the judge believes that the Plaintiff should have recognized that there was not a reasonable prospect of specific performance, damages will still be limited to $100,000.00 and the poor Plaintiff will have to find the difference themselves.

Specific performance actions are also subject to the principles of equity, which among other things, require:

  • that the Plaintiff moves the action forward quickly.
  • that the Plaintiff have “clean hands”- thus, not be partially to blame for the failure to close;
  • that the Plaintiff must be “ready, willing and able to perform”, which will tie up the Plaintiff’s financial resources and leave them in limbo.

Equitable remedies are always discretionary, so the court will not grant specific performance if for any reason it would be unfair or create undue hardship. For example, specific performance was denied where the seller was more susceptible to accepting the offer because his wife and business partner had just been murdered. By the date set for closing, the seller was determined to continue the business.

Specific performance will also not be ordered where it is impossible for the seller to comply, for example where there was a prior sale of the property, or government regulations prevent the sale.

A vendor, as noted, above may, in rare cases, seek specific performance. These cases typically involve land used in operating a business, where the vendor wants to get out of the business, and the purchaser had special reason to offer a premium price, or there is no ready market to find another buyer. These are examples where the transactional details are crucial facts.

If specific performance is not available, or is too risky to pursue, the option remains to simply sue for damages.

So if the deal does not close, you need advice from an experienced litigation lawyer immediately. Working together with you and your real estate lawyer, a game plan will be decided upon, with the risks at the level which you can best tolerate.

(In drafting this article, I have referred to a text by Jeffery Berryman, The Law of Equitable Remedies, second edition, which I use in teaching my course on Remedies at the Bora Laskin Faculty of Law.)