The Implications of Backing Out of a Real Estate Transaction*
A residential real estate transaction generally has three key components, the offer, acceptance of the offer and the closing. While these events aren’t necessarily long and drawn out as individual instances, the total process can take weeks or even months to complete. An accepted offer is typically referred to as an Agreement of Purchase and Sale (APS) and in Ontario it is normally completed using a standard Ontario Real Estate Association (OREA) form.
From the time you submit the offer to the closing date a lot can happen in life. Maybe you got a promotion, or maybe you lost your job. Either way, there can be a variety of life changing events that occur in the middle of your transaction. As mortgage brokers, the Cascade Mortgage Capital team advises our clients to maintain the status quo as much as possible leading up to the closing of the property. Wait to get that new cell phone or new car, take any trips or make any other large purchases.
In the overheated market of 2021, it was standard practice to make offers without any conditions, but as we have turned the corner into a market littered with uncertainty this is quickly becoming a major risk for buyers. The standard OREA offer form does not provide buyers with any security by way of conditions that can allow for a deal exit. This is something that you and your realtor would have to incorporate into the Schedule A of your offer. The Schedule A is an additional section of the offer where you can write in any clauses that would allow you to exit the deal without any repercussions. An example of this would be to have the purchase conditional on receiving financing or the completion of a satisfactory home inspection.
Regardless of any buyer’s remorse, change in your financial situation or the failure of your home to sell, unless you have conditions in the APS, you are liable for failure to complete the purchase. Losing your deposit is just the beginning of the remedies available to the seller for breach of contract. They have the option to pursue further damages if they can prove that your decision to back out of the deal causes further damage. How this would typically play out is that the seller will list the home until it is sold, if they can show that they did their best to ensure that the home sold for as much as possible, they can pursue the difference from you.
Say for example that you bought for $2,000,000 and made a deposit of $100,000. You don’t have any clauses or conditions in the APS to allow you to exit without penalty, but you decide that you must cancel the purchase and will forfeit your deposit. The seller then relists the property at $2,000,000 and fails to get any interest. They then adjust the price to $1,900,000 and still fail to get any interest. This downward pricing activity continues until they find a buyer. Let’s assume that buyer comes in at $1,500,000; there is now a shortfall of $400,000 from your purchase price minus the deposit and the new purchase price. The seller has the ability to show clear damages on your part through the breach of contract. They are within their rights to sue you for the difference. They are also within their rights to sue you for the carrying cost of the additional time it took to sell the home. Here’s the most important line in this article, in Ontario, sellers have sued for breach of contract and won.
What can you do as a buyer to avoid these issues and mitigate the risk of backing out of a deal?
First and foremost, protect yourself with professional expertise; work with the best professionals in the market you are in. That means doing business with an expert Realtor in that market, for example, don’t use a Toronto condo expert when buying an investment property in Guelph. There is nuance in that market that the Toronto expert likely does not know.
Get the best legal advice you can afford; consider that this is likely the most or second most expensive purchase you will ever make in your life, don’t cheap out on legal advice. Consult your lawyer on all the details outlined in your APS and ensure that you talk through scenarios and understand the implications of each action you could possibly take.
Add clauses that make the purchase conditional on obtaining financing and an inspection of the property into the Schedule A of your APS. You could also work with the seller to find reasonable solutions to any roadblocks your deal may face rather than breaching the contract.
In a heated real estate market, it may be suggested or emphasized the need to present an offer without conditions to be most competitive. In 2021 this would have been somewhat necessary due to the overheated market in Ontario, in today’s market this is bad advice. Protect yourself through the use of conditions, and if your chosen expert is not willing to accept this, then you’d be better served finding a new expert than continuing with their advice.
To summarize, there is no easy way out of a firm real estate transaction. The key to this process, like anything else in life, is pragmatic planning. Know what your options are, plan and prepare for all the possible scenarios that can occur and you’re immediately a step ahead in the process. Most of all, before you seek to buy a property, make sure you are pre-approved to see how much of a mortgage you can qualify for. Call our licensed mortgage agents at Cascade Mortgage Capital for trusted advice. If you have found yourself in a potential breach of contract situation and need legal assistance, we recommend speaking to an expert at either of the following law firms:
Avi Slodovnick
*This article is for information purposes only and is not intended to offer any legal advice whatsoever.
