Stock photo (Canva)

 

QUICK HITS

• A buyer agreed to purchase a home, but before closing, the property was destroyed by fire, triggering an insurance clause in the APS. 
• While the seller provided insurance details and extended the closing date, the buyer ultimately refused to close without a guaranteed minimum insurance payout, which was beyond the APS terms. 
• The court ruled that the buyer had breached the agreement, allowing the seller to retain the $25,000 deposit.

 

Often, several weeks or months pass between the signing of a binding Agreement of Purchase and Sale (APS) and the scheduled completion date for the purchase of a property. During this period, the seller retains possession of the property and is generally responsible for maintaining it in the same state as when the buyer agreed to purchase it.

If substantial damage occurs before closing, the buyer is allowed a reasonable opportunity to assess the damage and may have the option to terminate the transaction. However, if the buyer does not take the necessary steps, they may still be obligated to complete the purchase.

These circumstances were illustrated in the Ontario Superior Court of Justice decision in McDonald v. Lowrie.

 

Fire damage and insurance considerations

 

In early May 2024, the buyer entered into an APS with the seller to purchase a rural “century home” on a two-acre lot in Tillsonburg, Ont., for $775,000, with a $25,000 deposit. The transaction was scheduled to close in August 2024.

The APS was in the standard Ontario Real Estate Association form and included clauses addressing the entire agreement and that time would be of the essence. It also contained a standard “insurance clause” stating that, in the event of “substantial damage,” the buyer could either terminate the agreement and receive a refund of the deposit or proceed with the purchase and take the insurance proceeds.

Unfortunately, on May 22, 2024, a fire destroyed the home.

By July 2024, the buyer’s lawyer invoked the insurance clause, requesting details of the available insurance coverage. In early August, the seller’s lawyer provided a copy of the insurance policy, confirming its validity. Since the insurer was still in the process of assessing the claim, the parties agreed to extend the closing date to Aug. 28, 2024.

 

Seller’s insurance settlement and buyer’s response

 

On Aug. 26, 2024, the seller forwarded the insurer’s offer to settle the insurance claim. A contractor had quoted $973,813.94 to rebuild the house, and the insurer proposed two options: hiring a contractor to rebuild the home or taking a cash settlement of $749,375.37, which accounted for overhead, profit and taxes.

The buyer requested a one-month extension to consider the proposal, but the seller agreed only to a brief extension. The parties formally set a new closing deadline for 5:00 p.m. on Aug. 30.

On Aug. 29, the buyer’s lawyer expressed concerns about the sufficiency of the settlement offer and again requested an extension. The seller maintained that the insurer had already provided a definitive commitment and that no further extensions would be granted. Instead, the seller offered to assign the insurance proceeds to the buyer.

 

Missed closing deadline and termination of APS

 

On Aug. 30, the seller tendered the closing documents, including an assignment of insurance proceeds. The buyer sent the balance of the required funds and a direction authorizing the property transfer but did not register the transfer on title. Throughout the day, the seller’s lawyer made several inquiries regarding the status of the registration.

Shortly before the 5:00 p.m. closing deadline, the buyer stated he would close the transaction only if the seller provided a guarantee of the minimum insurance proceeds payable for the loss. The deadline passed without the registration of the transfer.

Later that evening, the buyer’s lawyer proposed extending the closing date to September 3, 2024, while keeping adjustments as of Aug. 30, but the seller did not agree.

On Sept. 3, the seller’s lawyer advised that the buyer had repudiated and terminated the APS by insisting on a guarantee of the insurance proceeds. The seller returned the sale proceeds, minus the $25,000 deposit, taking the position that the buyer had forfeited the deposit due to breaching the APS.

 

Court decision and buyer’s breach

 

The buyer sought an order for specific performance, requiring the seller to complete the transaction. The matter proceeded to court based on written submissions, with both parties agreeing that there were no material factual disputes.

The application judge determined that under the APS, the property remained at the seller’s risk until closing. The insurance clause allowed the buyer to either complete the purchase with the insurance proceeds or cancel the agreement and receive the deposit back. However, it did not guarantee the amount of insurance proceeds or their collectability.

The judge found that the buyer had been provided with sufficient time and details regarding the insurance coverage. The seller had met all obligations, and the buyer had been given an opportunity to review the insurer’s settlement position. If the buyer was concerned about the insurance payout, the proper course of action would have been to cancel the agreement and retrieve the deposit.

However, the buyer instead attempted to introduce a new condition—requiring a guarantee of minimum insurance proceeds—which was beyond the terms of the APS. The seller was not obligated to accept this change, and as a result, the buyer was not deemed “ready, willing, and able” to close the transaction under the original APS terms.

The court dismissed the application, allowing the seller to retain the deposit.