A Collapsing Real Estate Deal – The Seller’s Perspective

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

  1. Do you want to complete the transaction?
  2. Will you suffer losses as a result of not completing the sale?
  3. Why is the buyer resisting completion, i.e., is the buyer unable to obtain financing after all; is the purchase price above market value (as the result of a falling market); or has the Buyer learned something about the property that caused him to change his mind.

I.         Saving the Deal

If you, or your solicitor, suspect that the deal is collapsing because of challenges the buyer 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 do you have information that may assist the other party in completing the transaction.

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 the “new” completion date is not enforceable and either party may set the completion date as long as reasonable notice is given.  In other words, if time is not made of the essence by the addendum granting the extension, then it isn’t and neither party can sue to enforce the new date.

As consideration for granting the extension, it is not unreasonable to ask for compensation from the buyer for actual costs incurred by you as a result of agreeing to the extension; additional mortgage loan interest is an obvious example.  You should not use the extension as an opportunity to “increase” the purchase price as this attitude may lead to further problems with the buyer.

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 transaction cannot be completed on the completion date but the seller 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 seller the risks much higher than those faced by the buyer but, particular attention should be paid to ensure that the buyer cannot back out of the transaction after possession has been given to the purchaser, proper insurance coverage is in place during the escrow period and caution should be exercised in allowing the buyer to do any additions or renovations prior to completion as any consequential damages will be the seller’s responsibility, since risk does not pass to the buyer until title passes.

3.            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, including demonstrating that you are ready, willing and able to complete.  Your solicitor will most likely send a “ready, willing and able letter” to the buyer’s lawyer.

II.       Walking Away from the Deal  

1.            Change in Sellers Circumstances

Alternatively, perhaps your situation has changed drastically since making the offer or since the last subject clause, or condition precedent was removed 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.

III.     The Transaction Did Not Complete, Now What?

Essentially, there are two options available to the non-defaulting seller:

  1. Allow the contract to collapse and, thereafter, elect to take the deposit; or
  2. Accept the repudiation/breach of the contract and sue for damages.

Options 1 and 2 are not necessarily exclusive.

1.            When is a Deposit a Deposit?

Traditionally, earnest money paid prior to the completion of the contract (customarily 10 % of the contract price) has usually been considered to be a “true deposit” which, according to the usual Real Estate Board standard form of Contract of Purchase and Sale, should be automatically forfeited to the seller after the buyer’s breach of the contract, without the seller having to prove actual damages.

However, not all money paid prior to completion is considered a deposit, for example a recent BC Court of Appeal case has thrown a wrench into the usual understanding of the traditional rules regarding damages by considering the deposit language in the standard form Contract of Purchase and Sale and deciding that the deposit is not automatically paid to the seller.  Rather, the seller is entitled to claim the money paid as a deposit on account of its damages which he would have to prove.  This decision serves as a reminder that parties interpreting Contracts of Purchase and Sale must review the wording of the relevant terms very carefully and with the assistance of their lawyer. 

Depending on the wording of the contract a party may be able the claim the deposit and claim damages that exceed the deposit. However, where the wording of the contract provides that the deposit is liquidated damages, a seller will be prohibited from seeking additional damages. As a result, it is common for contracts to provide that the deposit will be absolutely forfeited to the seller and the seller may claim any additional damages.  

Such a careful review is especially important if the wording of the deposit clause is not standard form.  In such a case the Court could characterize the deposit clause as a: true deposit clause; which is enforceable; a penalty clause, which is not valid; a clause describing an excess deposit, which may not survive the Court’s review; or anything in between.  In other words, just because it is called a “deposit” in the Contract that does not mean that it is a “true deposit” which can be automatically claimed by the seller if the buyer defaults.  You will need legal advice from a lawyer experienced in collapsing real estate transactions to help you determine if it is a “true deposit”.

2.            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 date of the breach would be unjust, the courts have applied different dates to assess the loss of property value. (In one circumstance the court declared that three months after breach of contract was reasonable as that was a reasonable period of time to resell the property. 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. i.e., a realtor’s commission may be due and payable, despite failure to complete the transaction, and in such a case it can be included in damages.

 No matter how the damages are calculated, when contemplating litigation, it must be remembered that a non-defaulting seller 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 and may need to aggressively sell the property. 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.