Common Problems in Real Estate Transactions

The real estate market in Canadian cities has heated up in recent years. With rising prices and limited offerings, multiple bids and bully offers are no longer uncommon. The urgency this instills can lead to many different problems for both buyers and sellers.  Two potential issues will be considered here: the consequences of sloppy drafting, and the consequences which can come from getting in too deep in a bidding war.

Drafting Errors and Rectification

First, consider the agreement and its drafting.  It is important to remember at all stages of the real estate purchase or sale process that an offer is made as part of striking a contract.  Once an offer is accepted there is a binding contract between the parties.  The written contract is meant to spell out the agreement, but it is entirely possible for there to be an error in the drafting, so that the written contract does not reflect the actual bargain.  There is no magic in a written agreement, it simply allows a complex agreement to be spelled out in detail and reviewed by both sides.  The most fundamental nature of a contract is when there is a meeting of minds between both sides.

One example of poor drafting comes from Vancouver, one of the hottest Canadian real estate markets. In this case, the vendor decided to test the market. He owned four properties in North Vancouver. He listed three of them for sale. They were known as 1901, 1927 and 1974 being their municipal address numbers. The fourth property was known as 1979.

Background

Offers and counter-offers were exchanged. Eventually, a deal appeared to have been reached. Unfortunately, the executed documents contained errors. The first was the purchaser’s corporate name – it was sometimes referred to in part as “Development” and in other places as “Investment”. The second problem was the agreed upon purchase prices. The prices had been written both numerically and then in words, but the two methods of setting out the purchase prices did not always match one another.  The purchaser paid the required deposits.

The purchaser then made a new offer to purchase the fourth property (1979) in place of 1901. Offers and counter-offers were exchanged but the parties did not reach an agreement. As a result of this development, the vendor took the position that the deposits should be returned by reason of there being no binding contracts for the sale of any of the properties due to uncertainty. The purchaser tendered but the vendor still refused to close.

The Trial

The purchaser sued for specific performance (requesting that the Court enforce the sale of the properties for the price in the contract) and for rectification of the errors if necessary. The trial judge agreed – the name of the purchaser was rectified such that “Investment” replaced “Development” and the prices were rectified to all be as numerically written. The court was not being asked to rectify a price that was incorrect. The parties had agreed on a price which was then written incorrectly in words. Neither party noticed the discrepancy, and if they had, they would have corrected it. It was their agreement as found in the evidence. In the judge’s words:

This is a classic case of rectification that falls within the principles set out by the Supreme Court in Fairmont Hotels [2016 SCC 56]. The parties agreed on the purchaser and the price and then “mistakenly included something else in the written contract” (para. 32), such that the written instrument does not reflect the parties’ prior agreement. This is precisely the type of situation rectification is meant to cure:

[38] To summarize, rectification is an equitable remedy designed to correct errors in the recording of terms in written legal instruments.

The Appeal

The vendor appealed to the British Columbia Court of Appeal (“BCCA”). The appeal court recognized that rectification is a discretionary remedy. The error alleged by the vendor was the judge’s failure to first find an agreement on the initial purchase price before finding a common continuing intention. Both parties relied on the decision by the Supreme Court of Canada (“SCC”) in Fairmont Hotels. That decision was one of mutual mistake. The hotel sought to change the character of the agreement from a sale of shares to a loan transaction. The purpose was a neutral tax treatment. There was no continuing intention that it was to be a loan agreement. The original intention was a sale of shares. Rectification requires an original agreement, with a continuing intention of the same, that was however recorded inaccurately. As stated by the SCC:

Rectification is concerned with contracts and documents, not with intentions. In order to get rectification it is necessary to show that the parties were in complete agreement on the terms of their contract, but by an error wrote them down wrongly; and in this regard, in order to ascertain the terms of their contract, you do not look into the inner minds of the parties — into their intentions — any more than you do in the formation of any other contract.

Bidding Wars and Breaking Contracts

Agreements to buy and sell real estate being contracts means there is an element to them not often considered in a hot market: what happens when they are broken.  A common misconception is that if a purchaser walks away from an accepted offer that the deposit is forfeit and that is the end of the matter.  This is not the case.  As shown in this situation when a purchaser walks away from an offer, and the seller ultimately sells the property for less money, the purchaser who broke the agreement is liable for damages for the difference between the price in the broken agreement and the price the vendor ultimately received for the property.  When a hot market suddenly cools the costs of this can be considerable, such as the $470,000 penalty for the unfortunate buyers above.

A deposit is simply an amount already in the vendor’s hands, so that if the agreement is broken no lawsuit is required to obtain it.  A damage award may be more or less than the amount of the deposit, and the potential cost of litigation may deter both sides from litigating over exactly how much a default is worth.  This does not change that the party in default, buyer or seller, is liable for damages.  The seller could be liable in exactly the same way if an offer was made, the market suddenly went up and the seller decided to renege on the deal to sell for more.  The seller in that case would be liable to the buyer for the difference between the value of the broken agreement and what it ultimately cost the buyer to obtain a similar property.

Care needs to be taken when considering entering into any type of agreement, and the amount of money involved means real estate agreements more than any other sort.  The potential costs of flaws in an agreement or breaking one are potentially immense.

Takeaways

  • Care should be taken by vendors, purchasers and real estate agents when drafting agreements of purchase and sale;
  • Assistance and review by a lawyer is a prudent precaution given the delay and expense caused by such errors;
  • The decision on rectification is persuasive, although not binding on Ontario’s
  • Caution should be exercised in making offers on properties, and the advice of a lawyer obtained on potential consequences

If you have questions about this topic, contact the real estate lawyers at Duncan, Linton LLP. We provide exceptional legal guidance on both commercial and residential real estate transaction and regularly produce exceptional results. Call us at 519-886-3340 or contact us online to schedule a consultation.