Every few years the residential real estate market takes a tumble after a considerable increase in price. If you are caught in the midst of the tumble, this article is for you.
Unfortunately, generally the law on residential real estate is not the clearest. But this article will try to outline some basic principles that have been consistently applied.
A. The Dilemma
During these periods, the purchaser is in a difficult position if it has purchased a property that has gone down in value. If the purchaser had mortgage financing lined up, the lender may want a greater down payment or decide not lend any money altogether.
Sometimes the purchaser feels it is unfair they have to buy something that has gone down in value.
So, what happens if the purchaser does not close?
B. Failing to Close
In residential real estate, the terms of the agreement are quite simple. The purchaser promises to pay a certain amount on a certain day. In exchange, the seller promises to provide the purchaser title (clear title) to the property. That in effect is the core of the deal.
Of course, there are items that go with the property. The property must be habitable, but depending on the seriousness of the defect, many of those issues can be addressed by damages and is not a good reason to not close. The topic of defects deserves its own article.
Focusing on failing to close: Once the purchaser fails to close on the closing date. Meaning, not providing the funds and executing the closing documents, the seller should tender the closing documents and must maintain they are ready, willing and able to close. This is to
reserve the seller’s right to seek a declaration for specific performance.
At this point the purchaser is in breach. It does not matter if the purchaser does not have sufficient financing. The purchaser’s sole responsibility under the contract was to close.
The unfortunate fact is the decrease in property prices is not a valid defence to a breach of contract claim.
C. What Now? Purchase Does Not Close
Now the focus is on the seller. The seller must assure the purchaser and at some point, the Court, that they were never in breach. The seller must demonstrate they were able to close.
After the closing date, the seller must take steps to mitigate its damages. How does the seller do this?
The seller can relist the property. The seller must make reasonable efforts to seek the highest price possible. But the expectation is not excellent efforts, just reasonable.
There is some good case law stating the seller is not required to give the purchaser an extension and can sell it a lower price.
The practical point is if the purchaser closes fairly quickly at the purchase price or very close to the purchase price, the seller should take it.
Moving on, once the seller sells the property, the seller’s damages have been crystallized and is in a good position to seek recovery from the purchaser for the losses.
D. What Losses Can a Seller Recover from the Purchaser?
A basic principle of contract law is that the law should put the innocent party in the position they would be had the breaching party closed.
This principle in real life is sometimes tough to apply. Sometimes it is virtually impossible to meet this objective. Money can only go so far and forcing people to do things is not something Courts like to do.
Okay, so what can the seller recover? The law has consistently viewed the following are recoverable:
The difference between the agreed upon purchase price and the ultimate sold price to third-party
Carrying costs from the date of closing including:
Realty taxes
Utilities
Insurance payment
Any upkeeping costs
Appraisals costs
Realtors’ costs
Legal costs on both transactions
Interest costs
The deposit will generally be credited towards the losses. Meaning that the deposit will not be in addition to the recoverable losses.
The above summarizes generally what is recoverable. Every circumstance is different. The losses must be reasonable.
E. And, What Happens if the Seller Can’t Close on their Property?
A defunct sale can have a domino effect on a number of parties. For example, if one purchaser cannot close on Home A, and the seller is relying on the proceeds of the sale of Home A to close on Home B. Then the seller will be exposed to the purchaser of Home B. In theory, there can be a Home C and Home and so on and so forth.
The aggregate damage can become significant fairly quickly.
So, what happens?
A general contract principle is damages can only be recoverable if they are reasonably foreseeable or are a natural consequence of the breach.
The question becomes: are the damages that flow from the seller failing to close on Home B reasonably foreseeable or are a natural consequence of the breach?
The current case law goes both ways but is trending in favour that they are recoverable so long as they are in the ordinary course. In this day in age, sellers will generally be purchasing another home and will need those funds to apply towards the new home. Therefore, the loss is foreseeable.
F. Moral of the Story
Purchasers should close on their residential purchases. There is no upside to not closing and the downside can ultimately be unlimited.