What Happens if You Back Out of a Real Estate Deal?

As the housing market across Canada continues to explode, and prices escalate beyond the comfortable means of many, prospective buyers and sellers may wonder what the consequences may be if they change their minds midway through a real estate deal.

Many buyers believe that if they pull out of a deal while it is already in motion they will lose any deposit that they put down. While this is indeed true, there are also other, more serious, legal and financial implications to an uncompleted real estate deal as seen in a recent Ontario Superior Court decision.

What Happened?

In that case Justice Edwards ordered buyers who pulled out of a real estate deal to pay $470,000 to the sellers to make up the difference between what the house would have sold for if the deal went through, and the much lower price the sellers ended up settling for when the home finally sold to different buyers many months later.

As the judge rightfully noted:

When the residential real estate market is a rising market, most people – perhaps with the exception of first time buyers, are happy homeowners and investors.  When the market turns and drops, it is not for the faint of heart.  The facts of this case tragically demonstrate how one family, presumably desperate for their dream home, became embroiled in a bidding war and overextended their ability to finance the purchase price of that dream home.

The Facts

The house that formed the crux of this legal dispute was located in Whitchurch-Stouffville, Ontario and was listed for sale in March 29, 2017 for $2 million. Within a few days of the listing, three different sets of buyers presented offers. The buyers in question initially offered $2.05 million, before eventually increasing their offer to $2.25 million, which the sellers ended up accepting.

Under the terms of the offer, the buyers were required to provide an initial $30,000 deposit, with a second deposit of $90,000 to be made about a week later. The closing date was set for August 30, 2017. Importantly, the agreement of purchase and sale contained no conditions which would allow the buyers to exit the deal, and the deal was not contingent upon the buyers obtaining financing.

After paying the initial deposit, the buyers contacted the listing agent and informed him that they had begun to believe they had paid too much for the home and that they would be unable to obtain the necessary financing to close the deal.

The day after the second deposit was required, the buyers went to the property and told the sellers, in person, that they would be unable to close the deal due to lack of financing.

Approximately three weeks later, on May 1, 2017, the sellers relisted the property at a new price of $2.25 million. They received no offers. About two weeks later, they lowered the price to $1.99 million, but failed again to obtain any offers. By July 28, 2017, they agreed to lower the price to $1.78 million.  About two weeks later they received an offer for $1.7 million, and the transaction closed on October 3, 2017. In the meantime, they sued the original buyers.

The Decision

To successfully defend the claim against them, the buyers would have had to show that the sellers had not adequately mitigated the damages suffered due to the buyers pulling out of the deal. One way to do this would be to convince the court that relisting the property for $2.25 million (which is what they would have received from the buyers if the deal went through) was unreasonable, and that because of this, the sellers ended up losing money.

Unfortunately, the buyers were not able to convince the court of this. They failed to provide expert evidence that would have led the judge to conclude that the $2.25 million re-listed price was unreasonable.

The judge noted that he could only speculate as to what would have happened if the property had been relisted for a lower price (e.g. $2 million instead of $2.25 million), but if that happened, it “would not be unreasonable to speculate that in all likelihood [the buyers] would have argued that [the sellers] should have listed the property at a higher price, thereby reducing their potential exposure to damages.”

The judge additionally noted that he was satisfied that once it had become clear that the buyers had violated the terms of the agreement of purchase and sale and were not going to finalize the deal, the sellers had begun to mitigate their damages, and that they had acted reasonably in relisting the property at the price that they did, and in eventually reducing that price twice before closing the ultimate deal.

The judge made specific note of the current state of the real estate market, noting:

The impact of this court’s decision will undoubtedly have a dramatic effect on the [buyers].  I have every sympathy for the [buyers].  With the changes in the real estate marketplace in the Greater Toronto Area, I have every expectation that there may be more cases where purchasers find that they have overextended themselves in a declining market.  Purchasers would be well advised to consider making their offers to purchase contingent on financing, and for the sale of their existing home if they have one.

Buying or selling a home, condo, cottage, vacation home, or other real estate property is generally one of the biggest financial transactions people will undertake during their lifetime. The process can be emotional and very daunting. Consulting with a trusted and knowledgeable real estate lawyer early in the process can be the best way to minimize some of the stress involved in the transaction.

At Duncan, Linton LLP our real estate lawyers provide personalized, tailored legal guidance specific to the needs of each of our clients. We will work closely with you to guide you through the purchase and sale process, save you time and money, and avoid risk. Contact the lawyers on our Real Estate Team for clear, effective and strategic legal guidance on residential real estate transactions. Call us at (519) 886-3340 or contact us online for a consultation.