Purchaser defaults in today’s real estate market

273

By Rachel Puma
Robins Appleby

An increased number of purchasers are defaulting on the purchase of residential homes, whether condominium or lowrise freehold homes. This is particularly the case for homes sold at high prices at peak market (particularly in late 2021 and early 2022).

The long and short of it is that certain purchasers are simply unable to secure adequate financing to purchase the home on the closing date. In that case, many developers have been working in good faith with purchasers to keep the deal alive; most often, by permitting extensions to the closing dates in order to give purchasers time to come up with the shortfall of funds. But even then, some purchasers are unable to close.

So, what is a developer to do?

Vendor remedies

If a purchaser does not close on the closing date, the vendor is entitled to exercise its remedies at law, which includes the vendor’s ability to terminate the purchase agreement.

In that case, the vendor is normally entitled to keep the purchaser’s deposit. The vendor is also entitled to sue the purchaser for damages incurred as a result of the purchaser’s default. Damages include the difference between the purchase agreement sale price and the resale sale price, plus any reasonable additional costs incurred to resell the home (less the amount of the purchaser’s forfeited deposit). Additional costs may be additional legal, realtor or other professional fees incurred, and interest, realty taxes and other costs associated with the purchaser’s breach.

Recent precedents

Two recent cases dealing with failed real estate transactions in Ontario emphasize that a volatile real estate market will not excuse purchasers from complying with their obligation:

  • It should go without saying that purchasers have no right to demand a price abatement or any change to the terms of the purchase agreement. In Zoleta v. Singh and ReMax Twin City Realty, 2023 ONSC 5898, a purchaser “require[d]” an abatement for the difference in value between the sale price and ultimate appraisal value. The vendor did not agree to reduce the purchase price, and ultimately the purchaser failed to close. The court found that the vendor did not act in bad faith, nor had an obligation to agree to change the terms of the agreement. The court instead reiterated that a party to a real estate transaction may, in the absence of any bad faith, insist on strict compliance with the agreed upon terms of the contract.
  • In Gill Homes Inc. v 5009796 Ontario Inc. (Kassar Homes), 2024 ONCA 6, a purchaser delivered closing funds 35 minutes late, and the vendor terminated the agreement on the basis that the purchaser had defaulted as “time was of the essence.” The Ontario Court of Appeal agreed that the vendor was entitled to terminate the purchase agreement and retain the deposits paid by the purchaser. This finding was despite the fact that the vendor was not ready to close on an earlier original closing date, in which case both parties agreed to extend the closing date to the later and final closing date. The court made it clear that it will not “rewrite the parties’ bargain” under the contract, notwithstanding that the result may be “harsh.”

At the end of the day, purchaser defaults are happening and will continue to happen. However, developers are well within their rights to require the purchaser to strictly comply with the purchase agreement terms, even in a volatile real estate market; and purchasers will be held responsible if they do not comply with the deals they made.

Rachel Puma is an Associate at Robins Appleby. robinsappleby.com