Seller’s Remorse: The Consequences of Terminating A Real Estate Deal

In a previous article, I reviewed scenarios where buyers backed out of real estate transactions and remedies available to sellers. Similarly, I have experienced sellers wishing to back out of binding agreements of purchase and sale for a variety of reasons, often asserting that a return of a deposit leaves them “free and clear” of the contract. Some do this because there has been a change in market conditions and they believe a higher selling price is available, others simply decide they want to keep their property. However, a buyer can pursue the seller for a breach of contract, and the cost to the seller can be extensive. In these cases, the buyer generally has two possible remedies to pursue:

• Damages; or
• Specific Performance

Damages

Damages can be sought in any case where there has been a monetary loss by a party during a breach of contract. Damages are awarded by courts to provide monetary compensation for a loss or injury. When considering damages for a real estate deal where the seller breaches the contract, the court generally will consider the following:

• Deposit(s) and any accumulated interest;
• Expenditures made by the buyer, such as inspections, appraisals, real estate commission or otherwise; and
• Payments for any equity lost.

These principals are well demonstrated in Datta v. Eze (2020 ONSC 4796), which involved a purchase of a property in Brampton for $940,000.00. Approximately 3 weeks before the closing date, the sellers declared that they were “rescinding” the agreement of purchase and sale and immediately returned the buyers’ deposit. The buyers looked to obtain another house and were able to obtain a property for $945,000.00. However, the house they obtained was approximately 400 square feet smaller and the lot was 44% smaller. They were able to close on this purchase a few months after the original purchase fell through.

In Datta, the court awarded the buyers their out-of-pocket costs, but also considered the appreciation of each property up to the date of trial. It was found that from the original closing date, the first property had appreciated by $220,000.00. By comparison, the property the buyers acquired in replacement for it had only appreciated by $70,000.00. Therefore, the court determined that the buyers were entitled to the additional monetary damages of $150,000.00 for the equity they lost due to the sellers refusing to complete the original transaction.

In exceptional circumstances, the court may also consider other losses, such as loss of future profit. Damages can be significant in these cases depending on each individual set of facts. In the case of The Rosseau Group Inc. v. 2528061 Ontario Inc. (2022 ONSC 486 ), the land being purchased was intended to be used for development purposes. In this case, the court considered the estimated lost profits of the Rosseau Group in concluding that $11,122,345.27 in damages should be awarded. A steep price to pay when you consider the original agreement was to purchase the land for only $6,615,000.00.

It is important to note that when seeking damages, defendant sellers can allege that the buyers failed to mitigate their losses. That is, that by their own actions they failed to minimize their losses and therefore they are not entitled to have the seller cover the full extent of their losses. Mitigation is most often shown by the buyers expediently purchasing another comparable property, as the buyers did in Datta. In Rosseau, the defendants alleged there was a failure to mitigate as they failed to purchase a comparable property. However, the buyer in Rosseau was able to show that it continued to look at and purchase properties after the date the seller breached the agreement. The seller also presented a list of properties it considered comparable that the buyer could have otherwise bought in the interim. However, the court accepted evidence from the buyer that the properties were sufficiently different from the property at issue and not considered replacements, and further agreed with the buyer that the comparable properties were not otherwise available on the open market. The court therefore concluded that the buyer in Rosseau had mitigated its damages accordingly, and that the seller was not entitled to having damages reduced.

Specific Performance

Specific performance is rare remedy that courts will only award in certain instances where damages are considered inadequate. In a real estate context, specific performance requires the seller to complete the original contract and transfer the property to the buyer. The most commonly cited case for this is Semelhago v. Paramadevan ( [1996] 2 SCR 415), where the Supreme Court of Canada confirmed that for a court to order specific performance, the buyer must bring evidence showing the property is unique to an extent that a substitute would not be readily available.

The Ontario courts have since refined this test, noting that uniqueness considers all circumstance of the property, including the buyer’s specific requirements, market conditions, the type of property, it’s condition, its finishes, availability of similar properties in the same price range and proximity to certain amenities (Datta v. Eze, 2020 ONSC 4796, Ahmad v. Ashask, 2022 ONSC 1348). Specifically, the court in Sivasubramaniam v. Mohammad (2018 ONSC 3073) noted that there must be a “readily available substitute” available for the buyer to purchase in order for the court to find that the property was not sufficiently unique for specific performance, and that the availability of properties that were now outside the buyer’s price range due to market conditions, did not qualify as such substitutes.

When seeking specific performance, it may take many years for the actual property to be conveyed to its rightful buyer. In the case of Sivasubramaniam, the original agreement of purchase and sale was due to close in April 2015, and the order for specific performance and transfer of the property was made in May 2018, more than 3 years later.

Conclusion

Sellers should ensure they are certain they want to sell property prior to entering an agreement of purchase and sale. Should they be unsure of their desire to sell, an agreement should be carefully crafted by a lawyer to ensure there are clauses allowing sellers to exit the contract with minimal or no penalty. Once a binding agreement of purchase and sale is in place, so long as the buyer complies with their end of the bargain, the seller is obligated to transfer the property on the terms set out in the agreement. Sellers who fail to do so could be liable for damages or an order of specific performance.