A Collapsing Real Estate Deal – The Buyer’s Perspective

So you’ve entered into a Contract of Purchase and Sale to buy your dream home and now the seller doesn’t want to complete the transaction. What will you do? Your strategy may depend on the answers to a number of questions, including:

    1. How badly do you want the property?
    2. Will you suffer losses as a result of not completing the purchase?
    3. Is the property special or unique to you?
    4. Why is the seller resisting completion, i.e. is the sale price below market value (either as a result of the Seller’s under-valuation or a rising market); will the seller be unable to clear title; or is the seller unable to find a replacement house to buy?

I.             Saving the Deal

If you, or your solicitor, suspect that the deal is collapsing because of challenges the seller is facing in completing the transaction, you should review with your solicitor, and perhaps your realtor, whether or not there is a course of action that could facilitate completion of the transaction. i.e., should you grant an extension to complete, should you consider closing the sale in escrow, or should a holdback or reduction in price be considered.

1.            Extension

When an extension of the complete date is agreed to, care should be taken to maintain time as being of the essence.  If time is not made of the essence again, the situation may arise that you may not be able to stand firmly on your rights as to the timing of the contract and either party may set the completion date as long as reasonable notice is given. In other words, you may lose control over when the transaction may complete.  Depending on how much of an extension is being sought it may be worth considering a reduction in the sales price.

2.            Escrow

Essentially, “closing in escrow” is a phrase that has come in to common usage to describe the situation where, because of one reason or another, the seller is not able to complete on the completion date but is willing to give up possession of the property to the buyer if certain safeguards are put in place to ensure that the transaction is completed once the particular “obstacle” is removed.  While closing a transaction in escrow may be more common in other jurisdictions it is not as common in British Columbia and is fraught with risk. Before agreeing to complete a transaction in escrow, the risks should be carefully considered with your solicitor.  As a buyer, the risks are less than those faced by the seller but particular attention should be paid to ensure that proper insurance coverage is in place during the escrow period and caution should be exercised in doing any additions or renovations prior to completion and, therefore, the transfer of title to you.

3.            Price Change or Holdback

Another consideration is whether or not a holdback or a change in price will facilitate completion of the deal. That is, if the seller has failed, or is unable, to do something required under the contract, prior to the completion of the transaction you may wish to either negotiate a holdback, to ensure that they will fulfill their obligations, or negotiate a reduction of the price to compensate for the seller’s inability or unwillingness to fulfill his obligation under the contract. In our view, all things being equal, it is generally preferable to negotiate a change in price instead of negotiating a holdback because the former will avoid the inevitable debate concerning the terms of the release of the holdback.

4.            Preserving your contractual rights

When faced with the prospect of a collapsing deal, the contract must be reviewed carefully to ensure that you maintain strict compliance with its terms during the period leading up to the completion date, if you wish to maintain your right to enforce the terms of the contract. Most standard form real estate contracts stipulate that time is of the essence. It is important to ensure that time lines are monitored and closely adhered to.  Further, unless the seller expressly repudiates the contract prior to the completion date, thereby making it clear that they are not going to complete the contract, you should take the necessary steps to complete the transaction, right up to and including the tendering of funds, to show that you are ready, willing and able to complete.  Your solicitor will most likely send a “ready, willing and able letter” to the seller’s lawyer.

 II.           Walking Away from the Deal – Initiating the Collapse

1.            Change in Buyer’s Circumstances

Alternatively, perhaps your situation has changed drastically since making the offer or removing the last subject clause, or condition precedent and you want to find a way out.  If you find yourself in this position and you want to avoid completing the transaction, you should review the contract to determine whether or not there are any problems or weaknesses in the contract that you can exploit in order to collapse the deal. The majority of the terms in most standard form real estate contracts are time-tested “boiler plate” clauses that have been revised over the years often as a response to litigation.  However, where there is an opportunity to add custom terms to the body of a contract or the Addendum, this is often where problems do arise. These terms should be carefully reviewed to determine if there are any weaknesses.

Problems that most often arise in contracts can arise because of uncertainty relating to a fundamental term of the contract – a term that goes to the root or heart of a contract (i.e. who are the parties to the contract, what is the price, the property or timing of the contract). Are all these terms in your contract “certain”?

Simply ignoring or refusing to waive conditions precedent or subject clauses may not help you out of the contract.  There is case law that imposes upon the buyer a positive obligation to take reasonable steps to fulfill conditions precedent. Therefore, careful consideration should be given as to what steps need to be taken before deciding not to waive a condition precedent.

2.            Pre-Sale Contracts

The Real Estate Development Marketing Act, S.B.C. 2004, c.41 provides significant consumer protection for buyers of presale properties. Given the protection provided under the Act, special attention should be paid, and research should be conducted, to determine whether or not there have been breaches of Real Estate Development Marketing Act by the developer.  Such breaches may include: any misrepresentations made by the developer; the developer failing to provide to the buyer a disclosure statement that accords with the Act; and the developer failing to provide to the buyer every amendment to the disclosure statement as required by the Act. Generally, a breach of the Act will result in the buyer being entitled to rescind or revoke the contract.

III.         The Transaction Did Not Complete, Now What?

Essentially, there are three options available to the non-defaulting buyer:

    1. Allow the contract to collapse and, thereafter, demand the return of the deposit;
    2. Sue for specific performance of the contract; or
    3. Accept the repudiation/breach of the contract and sue for damages.

Options 1 and 2 are not necessarily exclusive.

1.            Accept the Collapse

If you choose Option 1 then you will want the deposit returned as soon as possible because you may need the funds to use as a deposit on a new property. If the seller has indicated a clear intention that he will not complete the sale of the property and you have decided that you do not wish to sue for specific performance, your solicitor should ensure that the deposit is released to you promptly without conditions.  This should be straight forward and almost automatic but, on occasion, an aggressive seller may request that the buyer sign a release of claims before the seller will agree to release the deposit. You should carefully consider with your counsel whether or not this request is appropriate as it will prevent you from suing for the damages you may suffer.

2.            Sue for Specific Performance

When setting the remedy for a breach of contract, the Court tries to put the innocent party in the same position it would have been had the breach of contract not occurred. Specific performance is based on the concept that in some circumstances, damages will not be an adequate remedy for the particular breach of contract. In the context of a real estate transaction where the property is unique, it affords a party the opportunity to stand on its rights under the contract and to force a completion of the transaction.  For a period of time, it was presumed that specific performance was a given with real estate. However, given the increasing propensity for housing to be standardized and “cookie cutter”, obtaining an order for specific performance has become rare. In order to get specific performance, the plaintiff must prove that the property in question had unique characteristics that are not readily replaced; clearly a significant hurdle for parties wishing to enforce a contract of purchase and sale for an apartment, condominium or town home. Damages may still be available even where the claim for specific performance fails; although it should be noted that where there isn’t a reasonable basis to claim for specific performance a plaintiff is required to mediate or minimize its damages.

3.            Sue for Damages

When calculating damages, the Court will try to put the party in the position it would have been had the breach not occurred. Often the main component of the damages will be the difference in the value of the property from the contract price. In calculating the loss, the normal date for assessing the value of the property is the date when the breach of contract occurred. Notwithstanding the foregoing, where the aforementioned date would be unjust, the courts have applied different dates to assess the loss of property value. Other components that may be included by the Court when calculating damages will be the other losses and expenses that the plaintiff has suffered and may include: closing costs incurred for the collapsed transaction, moving and storage costs, additional property or rental costs, interest and professional fees due or lost as a result of the breach.

No matter how the damages are calculated, when contemplating litigation, it must be remembered that a non-defaulting buyer cannot rest on his right to sue in the hope of eventually making himself whole – he has a duty to mitigate or minimize his losses. If the Court finds that the plaintiff hasn’t properly mitigated its losses, the plaintiff may not be awarded full indemnification.

IV.          Obtain Proper Legal Advice

Notwithstanding the various remedies available to the non-defaulting party to a transaction that does not complete, uncertainty about what to do as a result of the collapsing transaction and navigating the Court process is a stressful and wearing ordeal. After all, a man’s home is his castle and uncertainty about one’s home is extremely stressful.  In our view, the best way to ensure that the stress and frustration is minimized is to engage a lawyer, at an early stage, who has experience dealing with collapsing real estate transactions in order to ensure that the process is handled in as efficient and strategic a manner as possible.