Despite the economic disruption caused by COVID-19, the residential real estate market has continued its upward climb. Pressures on home buyers have intensified. “Clean” offers without meaningful conditions – for financing, for the sale of an existing residence, or for inspection, by way of example – have become the norm.
In many cases though, unconditional offers are poor choices: they often result in purchasers being unable to close in time. But our courts have shown little empathy for failed purchasers, repeatedly holding that vendors have no obligation to accommodate purchasers by extending closing dates to relieve purchasers from their own breach of contract.
The message is that purchasers should tread with caution and strive to put contingency plans in place if financing or the sale of their existing home falls through. Where purchasers can’t close on time, vendors’ only obligation is to take reasonable steps to limit their damages. The rationale is that purchasers should not be responsible for the full extent of losses that the vendor could have reduced by acting reasonably.
The duty to mitigate starts with the vendor’s efforts to replace the original purchaser. When the vendor makes her claim for the difference between the original price and the new price, the court will closely scrutinize the marketing and sales process to ensure that the vendor has acted reasonably.
Buyers who fail to close may be responsible for more than the shortfall in purchase price. Recoverable damages embrace all reasonable costs incurred by vendors in dealing with the breach and mitigating their losses. These include carrying costs, maintenance outlays, property tax, realty commissions, legal fees, as well as staging and other reasonable expenses. This is in line with the basic legal concept that courts should restore vendors to the position they would have enjoyed had the purchaser not breached the contract.
In some cases, buyers cite falling markets, offering to close for less than the original price to which the parties agreed. If the vendor refuses the lower offer, the buyer may try to allege a failure to mitigate. But courts have consistently ruled that vendors have no duty to mitigate until after the purchaser’s breach of contract. This suggest that vendors can ignore revised offers.
Courts have also awarded vendors the full shortfall even in the face of an appraisal that is substantially higher than the price paid by the replacement purchaser. Here, evidence of falling market conditions may help justify why the replacement sale did not occur at the appraised level. But the overarching point is that the law is vendor-friendly. Again, the obligation of vendors to mitigate extends only so far as taking all reasonable steps to limit their losses. Having done so, they will not be penalized if those steps did not culminate in a full realization of their shortfall. Since the purchaser’s breach created the problem, courts will not scrutinize reasonable vendor decisions too harshly. Put another way, purchasers who breach contracts have limited rights to complain after the fact.
Most agreements of purchase and sale (including the standard OREA form) include a “time is of the essence” clause, meaning that parties must respect the deadlines in the contract. Courts have repeatedly enforced these terms, with the goal of maintaining certainty and predictability in our property transfer system.
It can take several years to get lawsuits to trial. But in uncomplicated cases where key facts are not in serious dispute, parties can seek “summary judgment”, a much quicker process that allows judges to decide cases without a full-blown trial. As it turns out, failed residential property purchases are often straightforward cases that are great candidates for summary judgment.
Recently, Blaney McMurtry, representing a vendor, achieved a successful summary judgment hearing in just six months from when the claim was launched. Purchasers who have failed to close should therefore not expect to exhaust the vendor with “litigation fatigue” in the hope of inducing favourable settlements.
For the purchaser:
Given the strict approach taken by courts, purchasers should avoid unconditional transactions, especially if their ability to close depends on first selling their own property – and even more so if they lack a contingency plan. At a minimum, purchasers dealing with unconditional offers should try to negotiate the longest possible closing period.
For the vendor:
Vendors dealing with a failed closing should pay close attention to market conditions where the property is located. They should obtain at least one fair market value appraisal as of the re-listing date and retain a qualified real estate agent with local expertise.
Because courts will scrutinize the relisting and resale process, the Realtor should keep detailed notes of all steps taken to market and sell the property. In arriving at a listing price, the Realtor should carefully research comparable listings (both recently sold and current) and review community reports from the local real estate board. Where possible, the property should be well-staged with good photography and exposure to MLS. Given the court’s vendor-friendly approach to these cases, however, failure to complete any of these tasks may not be fatal to a vendor’s claim.
The bottom line:
Unconditional transactions will doubtlessly persist as long as the real estate market remains hot. The upshot is likely a continuing influx of failed closing lawsuits, most frequently determined in the vendor’s favour and often decided promptly by summary judgment. Purchasers should take these risks to heart: the courts will not impose a duty on purchasers to extend closing dates, as it would effectively be to condone breach of contract.
Varoujan Arman is a partner in the Commercial Litigation Group at Blaney McMurtry LLP in Toronto. He is also co-chair of the firm’s Fraud, Investigation, Recovery and Enforcement (FIRE) group. In addition to his law degree, Varoujan also holds the designation CFI, as an Accredited Certified Forensic Investigator in fraud matters.