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Fulfilling purchase agreements in good faith

In Tsui v. Zhuoqi, Ontario’s Superior Court of Justice addressed two complex issues. First, what duties do sellers owe purchasers when damage to a property may be substantial and second, what constitutes substantial damage to property?

The seller, Ye Zhuoqi entered into an Agreement of Purchase and Sale (APS) with the buyer, Sative Yan-Ling Tsui and set the closing date for January 10, 2020. The APS contained a standard “substantial damage” clause, which stated that in the event of substantial damage to the property, a buyer may terminate the agreement and all deposit monies paid by the buyer would be refunded. On January 9, 2020, the buyer attended the property for a final inspection and discovered extensive water damage.

On January 10, 2020, the buyer’s real estate agent sent an email notifying the seller’s real estate agent of the damage, with photos, stating that it was not sufficient to merely replace the flooring. The buyer’s agent provided the seller with two options:

  1. Allow the buyer’s own contractor to fix the damage while a holdback of $100,000 was kept with all living expenses covered by the seller or
  2. The parties would sign a mutual release with the sellers paying $25,000 to cover expenses of renting a new place and repurchasing another property.

The seller’s agent responded that the water damage was not as significant as the buyer alleged and denied the first option. The seller proposed the closing be extended to January 13, 2020 in order for the parties to have a more accurate assessment of damage and cost. There were further communications regarding the holdback amount but the seller rejected those subsequent offers and the sale did not close.

On January 13, 2020, the seller obtained a report estimating repairs at $10,000 and conveyed to the buyer that the seller would agree to fix damages and a holdback of $10,000. The buyer rejected this offer and requested that they have their own engineer inspect the property. This request was rejected by the seller, who advised that they would be re-listing the property.

On January 17, 2020, the seller’s agent notified the buyer’s agent that the seller had agreed to have the buyer’s engineer inspect the property. That inspection took place and the engineer stated in his report that “every property is different including the extent of damage from flood or fire, costs will vary considerably…consequently it is rarely possible to provide an accurate cost estimate for the emergency cleanup and dry-out services until after the work is well underway.”

The seller subsequently repaired the damage at a cost of $6,893, relisted the property and sold it to another buyer.

The Superior Court of Justice evaluated the evidence and arguments advanced and found the following:

Substantial damage

When assessing whether damage is substantial, the cost of the repair and the quality, character and consequences of the damage must all be considered. In this case, evidence from the experts and the photos indicated damage on at least two floors. As such, the buyer reasonably concluded that the damage was substantial. After receiving the expert report, the buyer was also reasonable in concluding that the cost of repairs could well exceed $10,000.

Good faith

The “substantial damage” clause in the APS is intended to protect the buyer. Parties must act in good faith and take all reasonable steps to ensure a real estate transaction is completed. Here, the seller lacked good faith by unreasonably denying the buyer’s own engineer an opportunity to assess the scope of the water damage given that it occurred approximately 24 hours before the scheduled closing date and there was real disagreement as to whether the damage was substantial. The buyer was thus entitled to independently assess the scope of damages.

In addition, the seller also failed to exercise good faith and to take all reasonable steps to complete the sale when he demanded the damage be fixed at $10,000 even after the expert report noted that further damage could not be assessed until the renovation work began. Consequently, the buyer was entitled to terminate the APS and have their deposit returned.

What does this mean for future sellers?

Agreements containing a “substantial damage” clause, or a similar clause entitles a buyer to independently inspect damage that has occurred on the property so that they may determine how they would like to proceed with the transaction. In performing this obligation, sellers are expected to act reasonably and in good faith by allowing the buyer to retain independent inspectors and to reasonably and in good faith negotiate with the buyer the cost of repairing the damage.

Christina Wang

Christina Wang

Christina Wang is currently summering at Boghosian + Allen LLP while completing her J.D. at Queen’s University. During her time at Queen’s, she was president of the Queen’s Environmental Law Club and a student researcher for Pro-Bono Canada.