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Mitigation of damages when an Agreement of Purchase and Sale is breached

When a purchaser fails to close a real estate transaction, in addition to showing that the seller was ready, willing and able to close on the scheduled closing date, in order to obtain judgment for any losses the seller may have suffered, the seller is required to show that they took all reasonable steps to minimize their loss. This is known as mitigation.

In Madison Homes v. Yiman Shi, 2020 ONSC 7810, the Ontario Superior Court of Justice recently considered what a seller must do to show that he/she did all they could to minimize their losses arising from the failed real estate transaction.

The buyers and seller (a developer) had signed an Agreement of Purchase and Sale for a property within the Cornell Rouge subdivision in Markham, Ont. for $1,717,224.57. The agreement was scheduled to close on Oct. 30, 2018. The closing date was then extended to Nov. 9, 2018. It did not close on Nov. 9. After several months, the seller resold the property for $1,242,964.11.

The buyers did not dispute that they were in breach of the agreement. They rested their case on the seller’s failure to get a higher resale price.

The court agreed with the seller and awarded it judgment for $353,582.28.

In outlining the law in this area of mitigation, the court stated that a seller has the initial burden of proving that it has suffered loss from the buyer’s failure to close. Once the seller has proven its loss, the onus then shifts to the buyer to show that the seller’s losses could have been reduced had the seller taken more reasonable steps. But what are the “reasonable steps” that a seller must take?

The answer lies in the market. The price the market will bear at the time of a resale is largely determinative in a seller’s litigation attempts. A seller will rarely be faulted for evaluating and watching the market, over time, to see if it will increase, as long as the length of time is not entirely unreasonable. In this case, the court found that the seller was not required to immediately relist the property when it was told by the buyers that the deal would not close on Nov. 8. In fact, an innocent party (in this case the seller) has options available to it in the face of a default. It can elect to terminate the contract and sue for damages or reject the repudiation and insist on performance of the contract. Here, the seller chose to insist on the closing of the transaction. When that did not occur, the seller weighed its options and listed the property when it felt the timing was right.

A buyer cannot argue with the resale value obtained by the seller, unless:

1. The buyer provides their own market evaluation or expert evidence from a Realtor about the value of the property and that that the seller could have obtained a higher price, whether through exposing the property more widely or taking additional marketing steps; and

2. The buyer can prove, again through professional opinion, that the seller’s delay in listing the property was unreasonable and negatively affected the resale price.

Absent positive proof by a buyer that a seller did not do its best when remarketing and reselling the property, the seller is entitled to be put in the same position it would have been in, had the original contract been performed. That is, the seller is entitled to the difference between the original purchase price bargained for and the price it obtained on resale (in this case, the difference of $350,260.46). In addition, the seller may also be entitled to additional carrying costs between the original closing date and resale closing date as well as any additional costs that should have been foreseeable by the buyer, such as extra interest and legal fees. The key here being foreseeability.

In summary, it is important that any buyer wishing to challenge the reasonableness of a seller’s mitigation efforts must present evidence to the court, from a professional such as an appraiser, real estate salesperson or broker, as to market conditions at the time of the breach and the time of resale, in order to mount a viable mitigation defence.