Remedies Available in a Collapsing Real Estate Transaction

I was informed by one of my clients that they were not concerned with waiving the condition inserted in an offer to purchase that they sell their property first, because their lender informed them they were only risking their deposit. They deposited $1,000.00 with this in mind.

It is important to consider what the purpose is of a “deposit”. Typically, a deposit is money that is paid prior to the completion of a contract to represent the purchaser’s honest interest and intention to complete the real estate transaction. After entering into a binding agreement of purchase and sale there is still the possibility for the buyer or vendor to default on the transaction. Commonly, the default will occur as a result of the buyer wishing to back out of the deal, leaving the vendor to once again look for a purchaser and claim damages that resulted by the breach.

The deposit is not given much thought in most real estate transactions. The standard OREA form says this: “The Buyer submits, upon acceptance/herewith/as otherwise described in this Agreement, $______.00 by negotiable cheque payable to ______ ‘Deposit Holder’ to be held in trust pending completion or other termination of this Agreement and to be credited toward the Purchase Price on completion.” This clause does not address what happens if either party breaches the agreement.

If no special clauses are inserted there is no language to address what should happen if either party breaches the agreement after the conditions are waived and the transaction is considered firm by both sides.

Many people misunderstand the terms surrounding a deposit and often assume that this deposit is automatically lost once a breach occurs, or that the deposit represents the limit on what damages can be recovered by the vendor from the purchaser. If the parties do not address this possibility when the agreement is drafted, the parties are left to either negotiate a settlement to allow for the deposit to be released in whole or in part to one of the parties or for the wronged party to bring a court action and have a judge decide. If the parties litigate the matter the deposit will most likely be either held by the deposit holder or paid into court. This could tie up the deposit for a purchaser and not allow them to move on until this matter is settled.

I will discuss what a court will consider and the obligation for the wronged party to mitigate their losses below but first this can be avoided if the parties turn their mind to this possibility at the outset.

The options available to address what will happen with the deposit if the agreement is terminated are:

• Rely upon the standard language which does not address it directly and leave it to be negotiated or litigated if and when required.
• Insert language to make it clear the vendor will be retaining the deposit in full and their right to an action if there are additional damages. “Upon termination by the buyer, for any reason, after the conditions have been waived the deposit shall be non-refundable, subject to the seller reserving its right to take action for full recovery of any damages incurred.”
• Insert language that makes it clear the vendor will retain the deposit as full satisfaction for the breach. “Upon termination by the buyer for any reason after the conditions have been waived the deposit shall be absolutely forfeited by way of liquidated damages.” This would allow the vendor to keep the deposit even if they did not suffer any damages. The vendor will also most likely be limited to that amount even if the damages incurred are more.

Regardless of how clear you attempt to draft the language in the agreement it often comes down to a negotiation between the parties. In most cases whether the deposit is in a lawyer’s account or the broker’s account, the deposit holder will require a signed mutual release to ensure all parties are agreeable to the money being released.

When the parties are left to resort to the courts to reach a resolution the judge will generally try to put the wronged party in the position it would have been had the breach not occurred. The items that will qualify for damages include difference in purchase price obtained through further sale, closing costs on abandoned purchase, rental costs, interest costs, real estate commission etc. There is an obligation imposed on everyone, however, to take all reasonable actions to mitigate their losses. In most cases this means to relist the property and take all reasonable actions to obtain the best price.

A 2010 case out of British Columbia, Hargreaves v. Brar, 2010 BCSC 538, highlights what will be considered unreasonable. When a buyer was unable to close on the date agreed upon, because the buyer’s property had not sold, the buyer asked for an extension. The seller needed the sale proceeds to close on the seller’s purchase and denied the request. The seller took the first step to mitigating her losses and relisted the property. The original buyer submitted a new offer at the same price with a later closing date. The seller did not accept the new offer from the original buyer but rather accepted a different offer at a significantly lower price from a new buyer. The seller sought damages including the difference in the purchase price in the original offer and the price that was accepted from the new buyer. The court found that it would have been more reasonable for the seller to have renegotiated her deal with the first buyer. As a result of her failure to act reasonably the original buyer was not required to pay anything to the seller; the seller’s claim was dismissed. The full case can be accessed by clicking here.

If as a real estate agent you are involved in relisting a property in an attempt to mitigate losses from a failed transaction, agents should be aware that the actions taken by them on behalf of the client will be subject to review by the court if a damage claim is made. A rushed sale that does not reflect the market value of the property may prevent or lessen a damage claim. If a substantially lower price is being entertained it should be supported by an independent appraisal.

This article can also be found in our November 2012 Newsletter which can be accessed by clicking here.

The content of this article is intended to provide a general guide to the subject matter. The information does not constitute legal advice and a solicitor and client relationship is not created.