Buyers beware, when you don’t buy: What goes down, may go up!

Warning

You are the purchaser of real estate. You have paid a deposit. You don’t complete the transaction. The failure to complete a real estate transaction has real and costly consequences.

As the purchaser, you risk losing your deposit and paying damages to the seller. In the context of a falling real estate market, the damages you may end up paying can go up.

And, the seller may be entitled to consequential damages arising from the failed transaction to compensate for other costs, such as:

  • Financing and other additional costs associated with another property that the seller bought with the anticipated sale proceeds from the property in dispute;
  • Upkeep and maintenance of the property in dispute including property taxes and utility bills; and
  • Brokerage fees.

Knowing this; plan ahead and seek professional advice before committing to a real estate contract.

Bear in mind that this paper speaks generally as standard form real estate contracts, drafted by the governing body for realtors, have changed over the years and some people draft their own contracts. Accordingly, you must always look at the express wording of the particular contract to assess how a deposit will be treated in specific circumstances.

Goodbye to your Deposit

It is well established law that when a purchaser repudiates the agreement and fails to complete the real estate transaction, the deposit is forfeited, without proof of any damage suffered by the seller.

The purpose of a deposit paid on a real estate transaction is to secure the buyer’s intention to complete the purchase. This concept is not new. In the 19th century, a court observed it is an “earnest to bind the bargain so entered into, and creates by the fear of its forfeiture and motive into the payer to perform the rest of the contract”.

The British Columbia Court of Appeal explained that the forfeiture of a deposit is an exception to the general rule that a sum of money subject to forfeiture on the breach of a contract is an unlawful penalty unless it represents a genuine pre-estimate of damages. However, where the deposit is of such an amount that the seller’s retention of it would be penal or unconscionable, the court may relieve the purchaser against forfeiture.

In deciding whether to grant relief, the court in British Columbia will consider two main things. Firstly, the sum forfeited must be out of all proportion to the actual damage suffered by the seller, which cannot be assessed until the seller’s actual losses have crystallized. Secondly, it must be unconscionable for the seller to retain the money. If the transaction is not unconscionable, it is not necessary to consider whether the sum forfeited is out of proportion to the vendor’s actual loss.

To set aside a transaction of unconscionability the court will look a number of factors, including:

  • An imbalance in the relationship between the parties such as the purchaser suffering from certain kinds of disability or disadvantage;
  • An imbalance in the terms agreed to between the parties creating a substantially unfair bargain;
  • Whether the conduct of the seller was reprehensible;
  • Whether the purchaser was the author of its misfortune; and
  • The negotiations were not in good faith.

Courts have made it clear that a finding of unconscionability must be an exceptional one, strongly compelled by the facts of the case. The court’s use of factors to assess unconscionability is context-specific.

Of note, the courts have held that a seller can keep a substantial deposit even where it sold the property to a third party at a higher price, and as a result suffered no damages.

But wait there’s more…

Quite apart from the purchaser forfeiting its deposit, it may also be liable for damages consequent on the breach of contract. In a falling real estate market, this can be acutely painful for the failed purchaser.

The basic principle in assessing damages for breach of contract is that the innocent party should be put in the position it would have been in if the contract had been performed. The general rule is that damages are to be assessed at the date of the breach. This rule, however, is not set in stone. The court can exercise its discretion to apply a different date to ensure a more just result.

In a volatile market that makes it difficult to find a willing buyer, the selection of a date for the assessment of damages can be significant. The court will consider a variety of factors to decide the date for assessing damages, including:

  • The claimant’s duty to take reasonable steps to avoid its loss;
  • The nature of the property; and
  • The nature of the market.

If the court is satisfied that the seller took reasonable steps to sell from the date of the breach and resells the property in some reasonable time after the breach, the court may award the seller damages equal to the difference between the contact price and the fair market value on the date of closing. Importantly, if the court finds that the seller retained the property in order to speculate on the market, damages may be assessed at the date of closing.

Further, an innocent party is entitled to recover consequential damages. The court’s assessment of what consequential damages a party can recover will depend on the specific circumstances of each case, but can include:

  • Interest;
  • Insurance;
  • Hot tub chemicals;
  • Telephone;
  • Gas;
  • Hydro;
  • Professional fees; and
  • Property taxes.

The extent to which these consequential damages may be recoverable is limited by two principles: causation and remoteness. The test for determining whether a particular claim is too remote in the context of damages for breach of contract is whether the losses claimed were reasonably contemplated by the parties as liable to result from the breach.

Applying a Forfeited Deposit Against Damages

In the situation where a purchaser breaches the contract but the seller does not sustain any losses, the seller is entitled to the deposit. The reason the deposit is forfeited in that situation is because it was provided by the purchaser not just as part payment, but also as a security mechanism to incentivize completion of the transaction.

By contrast, where a seller does suffer loss because of the purchaser’s breach, the question emerges: is the deposit treated as part payment and credited toward the damages, or is it retained in addition to the damages?

In a 2019 decision of the Ontario Court of Appeal, the court answered this question: where the land is sold at a loss, the seller is entitled to recover that loss, less the amount of the deposit. In its reasoning the court analyzed the agreement of purchase and sale noting that the deposit would be applied as a credit to the payment obligation owed by the purchaser to the seller on completion of the transaction. The measure of damages is based on the difference between the purchase price and lesser amount that the property sold for after the purchaser’s breach. Accordingly, it can be inferred that the intent of the parties was that the deposit be applied to the purchase price whether received on completion or as damages.

While not analyzing this question in the same detail, British Columbia courts have also credited the deposit toward damages: Albrechtsen v. Panaich, 2017 BCSC 1361.

Bottom Line

There may be a variety of reasons why a purchaser cannot complete on a real estate transaction. Before entering into one, it is prudent to seek sound advice, plan for contingencies and be aware of the potential liabilities. The old adage, “In for a penny and out for a pound” is still current.

McQuarrie