What Happens When A Buyer Doesn’t Close?

Business

8 minute read

June 29, 2022

Really?  Is that where we are in this market?

We’re starting to have conversations like this?

Well, not necessarily.  I don’t think this conversation is indicative of the overall market, but rather it would be completely irresponsible for me to not discuss it, given we are seeing a handful of deals not closing as scheduled.

How many?

Well, as JF007 wrote on Monday:

…so a thousand listings reviewed to get 6 such scenarios so a .6% rate meh

So while this could be “much ado about nothing,” it could also be viewed as “much ado about something,” since we can no longer claim that all deals close in this market.

Back in 2017 when the market changed, I consistently received phone calls from media members asking, “Do you have any clients that have bought firm and are now ‘stuck’ because they can’t sell their existing home?”

You’ve heard this story before, right?

Try as I might to explain to whoever was on the other end of the line, “No, I actually don’t have anybody in that position,” and continue the conversation, those conversations always ended right then and there.

The media had an idea for a story, and they were going to write that story no matter what.  Their job was to find somebody who fit that narrative, and maybe they made a thousand calls to find that one agent who said, “Yeah, that’s happening to me right now.”

But that story, on the front cover of the real estate section, didn’t come with a disclaimer that said, “The rate at which these deals are failing to close is 0.6%.”

The truth is, we have no idea how many of these deals there are, but we do know that the number is more than zero.

Many people in our market don’t want to talk about this, but I welcome the conversation since I like to talk about anything real estate related.

On Monday, we looked at six properties that failed to close, which were subsequently resold, and five of those properties sold for substantially less, in June, than they had in March or April.

So now, let’s ask the obvious follow-up question once again:

What happens when a buyer doesn’t close?

The answer isn’t simple, but that’s because every scenario is different.

Allow me to provide a long-winded yet necessary answer, by starting from the very beginnning…

Let’s say a house is sold on April 1st, 2022 for $2,000,000 with a $150,000 deposit, and it is scheduled to close on June 1st, 2022.

Which of the following reasons is valid for why a buyer may opt out of the deal:

1) The buyer cannot obtain financing.
2) The appraisal came in at $1,800,000.
3) The buyers were engaged to be married and have since split up.
4) The buyers have not sold their house, which they need to do, in order to close.
5) There was a death in the buyer’s immediate family.
6) The buyer’s 2.79% mortgage rate hold expired.
7) Prices in the region where this house was sold have dropped 20%.
8) The buyer has moved to Mars.

Any ideas, folks?

Which of these reasons are valid?

I think 98% of you figured this out.

None of these is a valid reason.

None of these “issues” matter, in the context of the signed Agreement of Purchase & Sale.

John and Kate bought a house for $2,000,000 and split up?  Too bad!  They’re legally obligated to close.

The appraisal came in low?  Interest rates have increased?  The buyer lost his job?

Nothing matters.  Absolutely nothing.

So let’s now introduce a concept called anticipatory breach, which I wrote about on my blog in full back in 2019, HERE.

Let’s say that the buyers’ lawyer reaches out to the seller’s lawyer and says, “My clients can’t close on this transaction.  We aren’t bluffing, we really, truly can’t close.  So let’s sign a mutual release, and go our separate ways.”

The sellers have every right to say, “Go fly a kite.”

The sellers would be insane to sign a mutual release, unless the buyer had agreed to forfeit the deposit.

But in my experience, buyers never forfeit the deposit.  They always think there’s a way they can get out of the deal.

In this case, the seller’s lawyer would send a notice to the buyer’s lawyer explaining that they will not sign a mutual release, and that they fully expect the buyers to close as scheduled on June 1st.

But guess what?  The sellers, in theory, are now free to re-list the property for sale due to this “anticipatory breach.”

Why?

Well, because of our next concept called mitigation.

It’s the legal duty of the seller to attempt to mitigate losses at his or her earliest opportunity.

Anticipatory breach is a bit of a grey area, but if the buyer has shown that they aren’t going to close the transaction, then the seller could take this as an anticipatory breach and re-list the property in order to immediately mitigate losses.

Whether or not the seller re-lists, and/or re-sells, let’s say that June 1st comes along and the buyer doesn’t close.

Now what?

Now the buyer is in breach.

When a breach occurs, the world doesn’t end.  It keeps turning.

But a breach is serious and it signals a “part two” of sorts in the life of the transaction.

A common misunderstanding here is that the buyer automatically defaults the deposit, meaning that in this case, the seller keeps the $150,000 that’s being held in trust.  That is incorrect.

Irrespective of what happens in other countries or jurisdictions, those funds cannot be released from the trust account without a court order.

The day after the breach occurs, it is up to all parties to attempt to mitigate.

Now, any lawyer will suggest that an attempt to mitigate should begin with one particular party: the buyer.

In some cases of breach, the reason is simple, and a closing of the transaction can be worked out with the buyer, whether that’s a day later or several days later.  Maybe a week, maybe a month.  But I’ve had cases of breach that were simple and solved.

In this case, where our buyer has said, “I can’t close, I won’t close,” the seller and the seller’s lawyer then have to move on.

In the examples that we saw on Monday, we know that sellers often must re-sell and accept a lower amount.

Let’s say that in our example above, the property is re-listed for $1,995,000 on June 3rd, but doesn’t sell.  It’s then re-listed at $1,895,000 on June 23rd, and eventually sells for $1,800,000 on July 5th, with a scheduled closing of September 10th.

What now?

Potentially nothing.  As Bal wrote in Monday’s blog, not every seller is going to litigate.

But what happens to the deposit?

The seller has to sue for the deposit, and this can often take years.

However, the seller can apply for a summary judgment which is essentially an expedited release of the deposit, without going to trial.

But the seller can look for more than ‘only’ the deposit, whether it’s through a full trial or merely the application of a summary judgment.

Yes, our next concept is a big one: damages.

A seller may sue for damages and this can include just about anything.

In the case above, the obvious loss was the $200,000 difference between what the now-in-default buyer paid in April and what the property re-sold for in July.

But the seller can also sue for the carrying costs associated with owning the property from the originally scheduled closing date of June 1st, and the new date of September 10th.

Property taxes, heat, hydro, water, insurance, alarm system, landscaping, maintenance and upkeep.

But then there’s mortgage interest, and/or any penalties or fees associated with keeping the property longer.

Real estate agents can sue for commissions too.

And what about legal fees?  Oh, that’s a big one!  As many of you know, our neighbours south of the border are a more litigious society and I’ve often suggested that this is because their system differs from ours in one major way: in Canada, when you lose, you pay the other side’s legal fees.

All told, the damages in this case above are not simply limited to the $200,000 difference in sale price, but rather the list keeps going and going.

The truth is, the litigation could take years, but it’s worthwhile for the seller.

Now, how does the buyer defend him or herself?

For starters, that buyer will likely concoct a scenario whereby there was an undisclosed latent defect that made them scared to close the transaction, or that the seller didn’t provide access to the property for a pre-closing inspection, or any number of made-up claims that could provide a defense.

These defences are usually overlooked and dismissed, especially if there’s a paper trail to show that the buyer requested a mutual release and gave any reason to the contrary, ie. an email from the buyer’s lawyer detailing that the appraisal was low, or the buyer lost his job, etc.

But buyers do have two viable defences:

1) The buyer can claim that a delay in re-listing the property caused further losses.

2) The buyer can claim that the $1,800,000 sale price was below fair market value, and that the seller could have, would have, and should have obtained more.

In our case above, the original closing was scheduled for June 1st and the house was re-listed on June 3rd, so point #1 above can’t really be argued.

As for point #2, this is always subjective.  The buyer would have to solicit appraisals and opinions of value from multiple agents and appraisers that argue the market value was higher than $1,800,000.  In reality, this isn’t very easy.

The buyer can argue that the property wasn’t marketed effectively, or that access was made difficult, etc.  You’re as creative as I am, so come up with some ideas, and I’m sure they’ve been argued.  Lawyers who defend buyers in these cases likely have a laundry list of defences.

But absent any viable defence, what happens in these cases?

The sellers win.

I know it’s crazy to believe that a judge would really, truly look at a buyer in court and say, “I hereby order you to pay a sum of $264,183.18,” but it happens.  It’s happened a lot.

Do you want a real-life example?

CanLII provides access to court cases as a public record.

Here is one such case from 2020.

“Madison Homes v. Yiman Shi, 2020”

The buyer signed an APS for $1,717,224.57 on October 11th, 2016, and this transaction was scheduled to close in November 9th, 2018.

The buyer reneged.

The seller re-sold the property for $1,242,964.11 on May 24th, 2019.

The seller sued the buyer for $353,582.28, which was the amount due on closing, plus costs, minus the initial $100,000 deposit.

On December 1st, 2020, a summary judgment was granted in the full amount of $353,582.28.

The findings were interesting.

Here’s a highlight:

The defendants do not dispute liability.  They admit that the scheduled closing date was October 30, 2018, that there was an extension until November 9, 2018, that the plaintiff was ready, willing and able to close, and that the defendants did not close.  However, they argue that there are genuine issues as to damages and mitigation which requires a trial.

I find that there is no genuine issue requiring a trial. The defendants are required to put their best foot forward and yet have led no evidence to dispute the damages or to put into question the plaintiff’s mitigation efforts.

The judge refused a trial!

He granted a summary judgment!

That’s how bad the buyer/defendant’s case was, or how wrong their actions were.

Their defence was that they had the property appraised right before the scheduled closing date, and the appraisal was $1,200,000, but that’s not a defence!

Can you imagine if the market worked that way?

This case was open and shut.  But was it really ever open?

This case, and every case like it, showed that a buyer can’t simply walk away from a transaction because the market has changed.

Let’s look at one more case.

“Forest Hill Homes v Peter Ou and Ying Wu, 2019”

The buyer signed an APS for $1,729,820.99 on November 19th, 2016.

The deposits paid were $138,000.

Final closing was set for October 22nd, 2018.

The buyer reneged.

The buyer claimed misrepresentation, specifically that the sales agent described the deal as “the opportunity of a lifetime.”

But the most interesting part is the following:

The Defendants say that they paid bribes to the sales agent in order to be able to jump the queue of potential purchasers and sign the APS quickly.  This, they contend, excuses their non-closing and puts an end to the reciprocal obligations contained in the APS.  That said, there is no authority for the proposition that a person who pays a bribe can have the contract rescinded as a result.

Absolutely amazing!

This is the kind of stuff you hear about but don’t believe is true.

I have absolutely zero sympathy for these people.

They wanted a get-rich quick scheme and they paid a bribe to a salesperson at a pre-construction launch to jump the line.  They bought, the market dropped, and then they didn’t want to close.

So what happened?

The judge awarded $554,308.41 to the plaintiff.

There are a lot of these cases out there and we don’t need to go through them all.

But the point is: if a buyer walks away from a transaction because the market has dropped, and the seller wants to take litigation the distance, the seller will prevail.

Fortunately, these cases are exceptionally rare.  And they typically only happen in a 1-2 month window every 5-6 years when there’s a change in the market.

But when they do happen, the media loves to report on it, so don’t be surprised to read about this in the newspapers in the coming months.

Then what?

A return to normal in the fall?  A dead-cat bounce?  A prolonged balancing act?

Don’t worry, we need not decide that today.

We have the rest of 2022 in which to discuss…

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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21 Comments

  1. Derek

    at 9:07 am

    [55] … the court is not concerned with the market value of the property on the date of sale, that is a matter of negotiation between the parties. Once the sale price is agreed to, the defendant’s inability to secure financing is not a legal justification for failing to close an APS unless there is specific language in the contract to address the issue (eg. making the contract conditional on financing): Bang v. Sebastian, 2018 ONSC 6226, (aff’d on appeal, 2019 ONCA 501), at para. 36; Paradise Homes North West Inc. v. Sidhu, 2019 ONSC 1600; FSC (Annex) Limited Partnership v. ADI 64 Prince Arthur L.P, 2020 ONSC 5055, at para. 29; Forest Hill Homes v. Ou, 2019 ONSC 4332, at paras. 5-6; Perkins v. Sheikhtavi, 2019 ONCA 925; Arista Homes (Kleinburg) Inc. v. Griu, 2022 ONSC 1614; Park Avenue Homes Corp. v. Malik, 2022 ONSC 973, at paras. 34-36.

    [56] It is also clear that, since the defendant was in default of the APS, the plaintiff is entitled to retain the $93,398.50 deposit paid, although the deposit must be credited against any other damages claimed: Pleasant Developments Inc. v. Iyer, 2006 CanLII 10223 (ON SCDC), at paras. 7-8; Azzarello v. Shawqi, 2019 ONCA 820, at paras. 45, 53-54.

    [57] The damages amount is the difference between the price under the APS and the price of the new sale of the property once it closes, plus any additional carrying costs incurred by the Vendor in mitigating its loss and dealing with the Purchasers’ breach: Goldstein v. Goldar, 2018 ONSC 608, at para. 25.

    [58] See also Park Avenue Homes, at paras. 38-39:

    Against a purchaser who aborted an agreement of purchase and sale, the plaintiff vendor is entitled to its loss of bargain, which is the difference between the original sale price and the re-sale price for which the property was eventually sold. 767804 Ontario Limited v. Bartoletti, 1998 CarswellOnt 1567; Azzarello v. Shawqi, 2018 ONSC 5414; Bang v. Sebastian, 2019 ONCA 501 (CanLII); Victorian Homes (Ont.) Inc. v. DeFreitas, 1991 CarswellOnt 414, at para. 20; Briscoe-Montgomery v. Kelly, 2014 ONSC 4240 (CanLII), at para. 22.

    In addition, the jurisprudence recognizes that a Plaintiff can claim interest and interim financing costs, real estate commissions, legal fees, and other carrying costs associated with the breach. Briscoe-Montgomery v. Kelly, supra, at para. 23; Fang v. Peroff, 2014 CarswellOnt 3800, at para. 51; Azzarello v. Shawqi, supra, at para. 54.

    1. Jenn

      at 9:12 am

      So you’re a lawyer?!? Lol

      1. Derek

        at 9:37 am

        You don’t need a law degree to copy and paste–it seems to sum up the main damages issues nicely.

  2. Jordan

    at 10:27 am

    The 0.6% is homes that sold at the peak and resold recently. The percentage of actual deals that are falling through due to buyers reneging is higher because the research that was done doesn’t include homes that have since relisted and have not sold yet as well as homes where the seller didn’t even relist.

    1. Derek

      at 11:00 am

      It would be interesting to see how many GTA or 416 homes were sold and resold again (for less) in 2017, for example… See how “bad” it was, or whether it wasn’t really that “bad” at all, during that hiccup in the vertical chart.

  3. Cherry

    at 11:00 am

    March 2017 we sold our house. Buyer left for China and never bothered to list their house. Closing day came and went.. not a peep from buyer and her lawyer left at 5 the day it was to close saying he hadn’t heard from the purchaser. Thankfully we didn’t purchase on the other side, we rented. Our lawyer sent a letter demanding more of a deposit, they came through with the deposit, although didn’t return for a month, only to find the market completely changed and her financing was now an issue. I believe we had one more failed closing date and on the date we said we are done if it doesn’t close, she came up with enough money however the transaction didn’t close officially until the next day.. What did I learn from this.. the brokerage holds the deposit. We changed the wording so we held the deposit and didn’t have to go to court if the deal fell through.

    1. Oliver

      at 12:00 pm

      We sold May 2022 and were supposed to close July 14th. The sale was firm but the buyers weren’t able to close bc their home hasn’t sold yet. We offered 2 extensions and even offered to give them a mutual release for $100,000.

      They bought for $1,040,000
      We’re re-listing for $9,050,000 on Wednesday.

      It sounds like the law is on the sellers side, but we’re worried that we will never see our money.

      Does anyone have any insight on how to actually receive your judgement?

  4. EastYorker

    at 1:47 pm

    A judgement is one thing. Collecting is another.

    1. Condodweller

      at 2:19 pm

      Yes, this is the next challenge. Hopefully, there are better options than sending it to collections, which from what I’ve learned one can only hope for a small percentage of the amount owed. If the reason for not closing is that they decided they overpaid or couldn’t sell their home in time, I would assume a lean can be put on their old/new home. Banks don’t like others having claims to a property when they have a mortgage on it so contacting their bank may be useful.

    2. JF007

      at 3:17 pm

      credit history is yet another in case collection becomes an issue i am sure or maybe a criminal matter next could be yet yet another if the defaulting buyer refuses to honor a judgment cuz then they are in contempt…

      However it is spun it doesn’t end well for anyone for seller probably months of headache but with hope to recover some of the losses for buyer it’s pretty much is a sunk cost..

      Bottom-line real estate investing is subject to market risk please read the fine print carefully 😀

  5. Vish

    at 7:58 am

    What happens if the buyers can’t afford to pay say $300 K to sellers as per court order and files bankruptcy?

    1. Sirgruper

      at 9:45 am

      Then the seller ranks like any unsecured creditor and the deposit is distributed prorata amount the unsecured is there is anything left after the secured and preferred creditors. That’s why people settle. As, cost are rarely on a solicitor and it’s client basis so it may cost $100,000 in legal fees and the court may aware 40-60 percent of those costs. Finally, summary judgement doesn’t alway work is a court determines there is a triable issue. Another reason to try and settle at the default stage.

  6. Sirgruper

    at 9:56 am

    Great summary of what generally happens. Usually the brokerages get dragged into the lawsuits too.

    David, what about commission on a failed deal? The standard listing agrees says if it doesn’t close the broker gets 50% which I generally strike. Rarely do I see agents try to enforce it but I have seen it. Thoughts?

    Also, I could see a comeback in the market like in 1991 which was definitely a dead cat bounce. A topic worth discussing.

    1. David Fleming

      at 3:02 pm

      @ Sigruper

      I’ve always maintained that real estate agents have a bad enough reputation as it is – the moment we start coming after buyers/sellers for commissions in cases like this, then we’re really in the mud.

      For example, the Buyer Representation Agreement has a section for commission. Most agents say, “Ensure you write ‘2.5%+HST’ in that section so that if a listing only offers 2%, your buyer has to pay you the difference.” That’s the most insane thing I’ve ever heard! Imagine explaining this to your buyer client? Are our buyer clients going to think this is fair? I always write “As Per MLS” in that section, saying to my clinets, “I get paid what I get paid, and that’s that.”

      So if a transaction didn’t close, would I sue the seller or buyer for commission? No. I have better things to do.

      1. Sirgruper

        at 1:05 am

        David. You are a mensch. Today however we closed a difficult deal where to close, the purchase price was reduced by amendment by $100,000.00 and the agent insisted (without success) that he deserved commission on the original price. I like your method far more. Long approach will alway win.

  7. Derek

    at 2:01 pm

    I just realized David has posted on his regular week schedule and not his holiday week schedule. I hope he doesn’t pull the rug out and take tomorrow off from posting 🙂

  8. Laurie Gordon

    at 4:33 pm

    Thought this was a great article. People need to heed this advice.

  9. James spears

    at 2:22 pm

    Hello. I bought a house in Barrie this year with June closing for $1.2ml. After 3 weeks we found out that the driveway was encroaching the neighbour driveway for 3 feet. My lawyer send few letters to the sellers lawyer about this issue but their lawyer kept saying that it’s a minor issue and we shouldn’t have any problems.
    To me 3 feet of encroachments specially driveway is not minor and my lawyer told them if they don’t fix the issue we will not close. 2 days before closing they came to us with $10k reduction in price which my lawyer declined saying it’s not about money but we want clear title.
    We didn’t close and they relisted the property and sold it in july . They still holding $45k of my deposit and won’t give us a clear answer. They sold the property for $100k less then original sale.
    What do you think will happen to my deposit and will they sue me for the balance even though we had a cause not to close.

  10. Michael Marcus

    at 2:32 pm

    Our house was to close today but the buyer could not come up with $170k land transfer tax. We have expensed almost 75k in full renovations within our house. We have moved into a Condo, and are now carrying 2 residences. The deposit from the purchasers is 45k. Obviously held in trust. We await recourse. Can we sue for the costs that will be incurred until the house sells again. Also the purchasers are Montreal residents, and do not have Landed Status. What can we do?

  11. Mrs007

    at 8:25 pm

    What happens if Builder is making profit?
    Purchase 1.3M, Deposit 100k,
    Builder resale 1.25M?
    Builder still comes behind original buyer?

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