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Jul03

Getting Out of the Deal: The Buyer's Dilemma

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The real estate market in these last few months has taken quite the turn - the strong seller's market has subsided and some may even argue that we are entering a buyer's market. One of the significant consequences of this recent and abrupt shift is buyers wanting out of their executed agreements of purchase and sale. Why? They signed such agreements in the hot seller's market (likely sometime before March 2017), but their closings are during this cooler spring/summer, more buyer-friendly market. Accordingly, they believe they've overpaid for such properties, seeing as how similar properties in the area are now listing at much lower prices. They have the classic case of "buyer's remorse". 

These regretful buyers are now scrounging to find a way out of their deals prior to the closing date, and they turn to their lawyers to be their saving grace. Unfortunately, however, once an agreement of purchase and sale is fully executed, and is not conditional on any event (i.e., it's a firm deal), you have a legally binding contract with the seller party. There is no generous return policy. The only way out of such firm agreements, besides the unlikely case of the title search revealing a defect on title that the seller isn't willing or able to remove (or that title insurance won't insure over), is by mutual agreement between the parties.  However, in this cooler market where properties are remaining on the market for longer and selling for cheaper, sellers have no incentive to re-list their homes for sale. Thus, buyers have a very uphill battle in their fight to escape the deal.

Typically, when acting for the buyer in these cases, the lawyer will offer to write a first letter to the seller's lawyer advising of the buyer's situation and include some argument as to why the buyer should be able to walk away from a firm deal, scot-free.  The response from any decent real estate lawyer acting for the seller will normally be along the lines of "no, our clients are ready, willing and able to close". The negotiations may reach a point where the buyer is willing to forfeit a part of or all of its deposit to the seller in exchange for the seller agreeing to sign a "mutual release", which will release each of the parties from their obligations with respect to such agreement of purchase and sale. In the majority of cases, for fear and reluctance to proceed to litigation, the parties will agree to some form of a compromise that will usually lead to an extension to the closing date or a mutual release from the agreement.   

Nevertheless, if the seller is adamant on closing the transaction on the scheduled closing date (as is the seller's legal right), the parties must close the deal. If the buyer does not close, he or she will be in breach of the agreement. The financial consequences of this breach can be severe; the seller will have a claim to (a) the full amount of the buyer's deposit, and (b) the recovery of any and all costs and expenses that flow from the buyer's breach. It is this claim to (b) that should really worry buyers thinking of breaching their agreements. If the seller is forced to re-list the property and is not able to sell it for as high a sale price as it secured with the original buyer, the seller would have a claim against this buyer for the difference, along with all related costs and expenses (e.g., legal fees, court costs, interest charges, etc.). However, it can become even more complicated and costly for the breaching buyer if the seller required the sale proceeds on the closing date (Deal 1) in order for the seller to purchase another property shortly thereafter (Deal 2). In this case, the seller would have been forced to breach its purchase agreement on Deal 2, and now the buyer who breached on Deal 1 would be liable to the seller from Deal 1 for all costs and expenses that flow from the seller's forced breach on Deal 2. Needless to say, breaching these agreements can be extraordinarily expensive for the defaulting party.

An important caveat to the seller's right to sue the buyer for breaching the agreement is that once advised that the buyer will not or cannot close on the transaction, the seller party must begin to mitigate its foreseeable losses. In law, the duty of mitigation basically means that the party not at fault must use its best efforts to make the best of a bad situation. In real estate, when a buyer does not close on a real estate transaction, the seller must proactively take steps to reduce its potential costs and expenses that result from the buyer's breach. Typically, this means re-listing the property as soon as possible and quickly trying to secure a new agreement with a new buyer at a similar sale price as the agreement the seller had with the breaching buyer. When the matter gets to court, if a judge deems that the seller failed to mitigate effectively, its potential recovery from the breaching buyer may be negatively impacted. 

Of course, whether you are a buyer or seller in any of the above-noted situations, the facts and circumstances in every real estate transaction must be addressed on a case by case basis, so you should always consult with your real estate lawyer as to your best available options.

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Tel (905) 683-2741

Email: info@lcolaw.ca