Anticipatory Breach: One Giant Grey Area!

Business

9 minute read

November 3, 2021

Selling real estate is easy, right?

Not only does “a home sell itself” in Toronto, but you really just have to put a sign on the lawn, set an offer date, and voila!

Simple!

Perhaps I don’t tell the tough stories often enough, probably because the readers find stories like this one to be boring.  I know many of you like the photo-themed blog posts, and while some of you skip the market stats blogs, others thrive on them.  Who doesn’t love the “behind the scenes” posts, right?  There’s something for everybody on TRB, but the legalese-themed blogs don’t get a lot of love, which is why I don’t write them very often.

Writing about a “legal grey area” might put some of you to sleep, but it will also highlight the difficulties that exist in this market, so here goes…

In January of 2019, I wrote the following: “What Is Anticipatory Breach?”

This is likely not the most Google-friendly term, since I don’t think many buyers or sellers of real estate know what anticipatory breach is.

In the Toronto real estate market, most deals close, and 99% of the time, they close as scheduled.

But while these deals close, it doesn’t mean there aren’t bumps along the way.

In that 2019 blog post, I explained what happens when a buyer, after signing a firm agreement of purchase and sale, doesn’t show up with the deposit the next day.  This could constitute an “anticipatory breach,” and the seller might be free to sell the property to somebody else.

I say “might” because the law is one giant grey area.  Everything is theoretical in nature until there’s a court order or decision.

That 2019 story was nothing compared to the experience I had last summer…

We had a listing for very sought-after home that produced nine offers, and although some of the offers were just God-awful, as is always the case, our $1,399,900 list price resulted in a sale of $1,725,000.

The sellers were estatic.  They’d been in this house for quite some time, so it didn’t really “owe” them anything, but they, like many others in Toronto, were moving out of the city.  This was their opportunity to buy their next house in cash and bank savings that would set them up for the rest of their lives.

The buyer of the house was an agent purchasing for her own family.  She was lovely to deal with and the fact that she was not a developer, in this case, really helped.  They were a sweet family looking to get into the neighbourhood and the public school catchment, and both the sellers and myself were happy that they were the winning bidder in the end.

They produced a deposit of $150,000 which was healthy and far beyond the “standard” five percent.

This sale was signed, sealed, and delivered, so to speak.

The deposit went into our brokerage trust account, the property was updated as ‘sold’ on MLS, and the ‘SOLD’ sign went up on the lawn.

Case closed, right?

Not exactly.

It was only three days later that I received a phone call from the buyer/agent, who was clearly upset.

I’ll be honest: I was playing golf at the time.  It was the one weekday all summer that I took off to play golf.  And I love golf!  But I usually only play on vacation because I’m a very weak mental golfer, and I only do well when I’m alone, early-morning, nobody else on the course.  No slow, clueless, idiots playing ahead of me, with no concept of etiquette.  No cart-girls waiting in the middle of the fairway when I’m trying to tee off.  No bros crushing king-cans on the greens ahead.  Give me a 7am tee-time, let me go alone or with another single, and I’m going to shoot the lights out.  Put me in a foursome at 1pm on a busy course, and I implode.

On this particular day, golfing with two members of my team and a random single, I started par, bogey, par.

Then I got this call…

She struggled to get her words out, but eventually was able to explain that her husband had just lost his job, and they would no longer be able to obtain a mortgage.

She cried and cried.  She said she “had no options.”

“Can we just terminate the deal, and you can sell it to somebody else,” she asked?

I told her that I was afraid it wasn’t that simple.

What I didn’t tell her was that her offer of $1,725,000 was $42,000 higher than the next best offer of $1,683,000, but that discussion would come eventually.

Her offer also contained a 30-day closing, which my sellers loved.  All of the other offers were 60+ days, and the $1,683,000 offer came with an almost 90-day closing, since those buyers had to sell their condo and needed extra time.

I told her that before we had any further discussions, I wanted her to speak to my mortgage broker to see about her options.  She agreed.

I double-bogeyed the next hole after topping my tee-shot, which thankfully made it past the red tees…

A half-hour later, my mortgage broker called me.

“Dave, I have no clue what you’re going to do with these people,” he told me, not exactly soft-selling it.  “Neither of them work now; there’s no way they can get a mortgage.  But more concerning is the fact that this woman has no clue what she’s doing.  When I asked her about her down payment, she said, ‘We might put down 25%, but we might put down 10%.’  Dave, she thinks she can buy for over one-point-seven mill with a ten-percent down payment?  Isn’t she an agent?”

I put my phone on the green to attempt a putt, which I promptly putted past the hole, down the ridge, and off the green.  That ended up being my only four-putt of the season, although technically putting from off the green isn’t a putt, but I don’t see it that way.  Putter in hand = putting.

“I have no clue what she’s going to do,” my mortgage broker told me.  “She said she could get her husband’s uncle in the United States to write a letter saying the husband works for him, and back-date some pay stubs, but I don’t want any part of that.”

Could this get any better?  Really?

I called the buyer/agent back and told her that I would speak to the other agents who submitted offers and see if any of them were interested in coming back to the table.   She thanked me profusely, but I told her, “We have your $150,000 deposit, and you’ve just committed an anticipatory breach.  We’re not going to release your deposit without a mutual release where you’d be making up the difference between what we sell for and what you contracted to pay.”

She said she understood and that this was alright with her, and I was relieved.

I got on the phone with the agent who brought the second-highest offer and told her the news.  She’s been around a long time, she gets it.  She said she would talk to her buyers.

I called the agent who brought the third-highest offer, only to find out that they had bought another house last night.

I put my next tee shot in the woods.  I had basically mentally checked out of this golf round.  The phone rang all day long, and every two minutes there was another email or text message.  Little fires everywhere, and I don’t mean that show with Reese Witherspoon.

The next day, the agent who had brought us that $1,683,000 offer said she could get the buyers back on paper but for $1,675,000.  Very silly, I know.  Whether this was the buyers deciding to stick it to us for a paltry $8,000, or whether it was the agent, I didn’t care.  I wasn’t going to argue over $8,000.  She said they might need “more time” on the closing date though, as they were really concerned about selling their condo.

So now I had a $50,000 gap in price between the accepted offer and the potential backup, with a $10,000 cost associated with the longer closing.

What next?

What’s the move on my part?

Here’s where it gets really, really complicated.

This is one big grey area.  What constitutes “anticipatory breach” to one person might not be a breach to the next person.

Our in-house legal counsel agreed with me, and said that we would be free to sell the property to another buyer.

However, if we wanted to keep some of the deposit from the first buyer, we would need a mutual release signed by the buyer and seller, specifying how the deposit is refunded, and how much is refunded.

For argument’s sake, let’s say that we had sold for $1,725,000, there was an anticipatory breach, and we had a backup buyer ready to pay $1,725,0000.  Or, we had a backup buyer ready to pay $1,724,000, and we were fine to sell for $1,000 less.  Under the letter of the law, the anticipatory breach allows us to sell the property to that second buyer without first obtaining a mutual release from the first buyer.

Grey area.

What if the first buyer magically won the lottery and said, “I intend to close,” then what?  We’ve now sold to two buyers!

This is why, when you consider multiple legal opinions that may differ, it’s best to have that mutual release signed.  But if you need money from the first buyer who breached, then you may have an uphill battle.

And that’s exactly what we found.

We couldn’t sell the property to the second buyer for $1,675,000 until we came to an agreement with the first buyer.

I called her and said, “The good news is: I can get you out of this deal.  You won’t forfeit your $150,000 deposit, and you won’t get sued upon closing.  But you’ll have to eat $60,000 of that deposit to get out of the deal.  We’ll sign a mutual release for the remainder of your deposit, and you can get $90,000 of your deposit back, and move on from this.”

She thanked me, and said she would discuss with her husband.

Then radio silence.

Not just for that day, but the next one after that.

The second buyer was waiting in the wings asking what was going on.  They wanted to get out and start looking at other properties, if we weren’t going to sell this house to them, and with every passing day, we risked losing them!

It took four days for the buyer/agent to call me back, and when she did, she threw me for a loop.

Her exact words, and read this carefully, “David, we’re going to do our best to close.”

What the eff?

Your best?  What does that mean?

Not only that, she had not taken back the anticipatory breach.

The brightest legal minds would be confused by this one, folks!  The anticipatory breach from one week earlier would have allowed us, in theory, to re-sell the property to a second buyer.  But now, she said that they would “do their best to close,” which wasn’t the same as “we will close,” but was no longer, “we can’t close.”

I was snookered here.

“We don’t want to give up our deposit,” she explained.  “So we’re going to get creative with our mortgage broker and find a solution.”

I wasn’t sure what that meant, but I didn’t want to know.  And what’s more, is that I didn’t care.  It’s not my job to investigate whether somebody is “getting creative” legally or illegally, nor am I party to this, nor do I have any evidence.  This is where one of you normally comes out of your utopia to stand up on your soap-box and tell me to contact “the authorities,” as though the World Police is on standby for just this occasion, but I had filled out the Receipt of Funds a week prior, so whatever happened from here is on the lenders.

I was still quite concerned with the idea that she would “do her best to close,” and I asked her what that meant.  She then said, “We will close, don’t worry.”

That was reassuring.

But then she added, “We will do our best.”

Dammit!

Was this a language barrier?

I asked her, “Are you going to close, or not?”

Comically, she replied, “Yes, David, we will close.  We will.  We will do our very, very best.”

There was nothing I could do at this point!  There was no longer an anticipatory breach so I couldn’t resell to somebody else, so as with every single transaction that takes place in our market, my only action item was to do nothing at all.  Just sit and wait until closing.

So that’s what I did.

I told the buyer agent with the backup offer what had happened and she laughed.  “I’ve seen it all,” she said.  “Good luck!”

I spoke with our in-house legal counsel again and he echoed the above sentiments.  He couldn’t help but smile.  We essentially went from a manageable grey area to a difficult black-and-white with a hint of grey, but not enough for us to make a move to our liking.

I kept in touch with the agent over the next three weeks as we proceeded toward the closing date, and she assured me that they would close.  This time, she didn’t throw in “we’ll do our best.”

There wasn’t a single sign of trouble, and even on the day of closing, not a word fro the lawyer on either side.

By 3:00pm, the funds were transferred and the deal had officially closed.

I don’t know how the buyer closed in the end, but I also don’t know if the husband really lost his job and if they really had to get out of this deal in the first place.  The timing was suspect.  To lose your job two days after you purchase a home is a bit coincidental, no?

In situations like these, I always try to look back and see what I can learn, but it’s hard in a case where you have no clue what was true and what wasn’t.  I think we can all agree that there were things going on behind the scenes here that either I wasn’t privy to, or that could have added additional context and clarity.  But in the end, all that matters is that the deal closed.

A good question to ask would be this: David, when you’re reviewing offers from buyers, do you require any sort of proof of mortgage pre-approval or personal finances?

The answer, naively, is no.

I always ask.  Why not ask?

But is the buyer required to provide documentation?  No, they’re not.

And this is amazing because every time I have a buyer-client from the United States, they always email me their mortgage letter from the lender, and then ask, “What else do you need?  A bank statement?  A letter of introduction from my financial planner?”  And they are SHOCKED when I tell them, “I don’t need any of this.”

Every system works differently.  In a case where a buyer can’t close, we’d look back and say, “There should be more diligence on the buyer’s finances!”

But when 99.99% of deals written end up closing without issue, we might be equally as naive to complicate the process that already works so well and runs so smoothly.

Hindsight is 20/20.

Unfortunately, firm deals falling through happens so rarely that we can’t really learn anything from this experience, save for the concept of “anticipatory breach.”

But the concept is merely the theory.  The implementation of a response to that breach will keep market participants on their toes no matter the situation…

Written By David Fleming

David Fleming is the author of Toronto Realty Blog, founded in 2007. He combined his passion for writing and real estate to create a space for honest information and two-way communication in a complex and dynamic market. David is a licensed Broker and the Broker of Record for Bosley – Toronto Realty Group

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9 Comments

  1. Francesca

    at 7:58 am

    Thank goodness it was only a 30 day closing and that your sellers were purchasing in a cheaper market. I can’t imagine your sellers waiting for a longer closing than that not knowing if it was actually going to happen. I wouldn’t be able to sleep at night with that kind of uncertainty. I’m glad everything worked out it the end for everyone involved and it’s a good thing situations like this are an anomaly.

    1. GinaTO

      at 9:33 am

      Yes, I can’t imagine the anxiety waiting for the deal to close!!!

  2. Ed

    at 9:27 am

    I hate it when someone is on the phone half the time when golfing. Need to take one quick call? I’ll let it go. But multiple texts and calls, sorry but you just disrupted the rest of the foursome.
    That is just poor golf etiquette. No different from talking when someone is hitting or slow play, leave the phone in the car.

    1. David Fleming

      at 10:15 am

      @ Ed

      I agree. But when four real estate agents golf together, it’s like a Bell Telephone switchboard in the 1950’s… 🙂

      1. Ed

        at 11:57 am

        Golf at night, everyone else is sleeping. 😉

  3. Steve

    at 10:01 am

    Are pre-approvals really worth the paper they are printed on anyway?

  4. Sirgruper

    at 11:39 pm

    Where was the Seller’s lawyer on all of this?
    I personally play better golf when I think less and just play.

  5. GinaTO

    at 9:36 am

    I actually love those “legalese” posts, keep them coming!
    When we bought in New Brunswick I was ready to give a sizeable deposit right away – what I was told was “You have a week to give the deposit. $5K is the norm”. Didn’t expect that!!!

  6. Condodweller

    at 10:31 pm

    Sometimes you gotta roll with the punches I guess. I like how someone is supposed to just leave $60k on the table like that. I think I would move a mountain to close a deal if otherwise, I’d lose that kind of money.

    “A good question to ask would be this: David, when you’re reviewing offers from buyers, do you require any sort of proof of mortgage pre-approval or personal finances?”

    This is quite the double standard, isn’t it? You expect no conditions (specifically on financing) in offers yet you’d expect buyers to prove their creditworthiness?

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