Date: December 28, 2022
Let’s say you want to purchase a home for 1 million dollars. Your real estate agent advises you to make an offer of 1 million dollars without including a condition for approval of mortgage financing in the agreement of purchase and sale. The Seller accepts your offer to purchase the home for 1 million dollars.
After an appraisal of the home is completed by your bank, the bank tells you that the fair market value of the home is actually $800,000.00 as a result of a rapid decline in the real estate market. Consequently, the bank advises you that they are not able to provide you the full amount of the mortgage funds to purchase the home due to the drop in the market price of the home and that you would have to obtain the funds from somewhere else to cover the short fall of the purchase money. The closing date for the home is close and you do not have the additional funds to purchase the home, despite attempting to obtain additional closing funds from other sources.
Consequences of Not Having Closing Funds
If you do not have the purchase money to close the real estate transaction then you will be in breach of the agreement of purchase and sale. The consequence of the breach is that your deposit amount will be subject to forfeiture by the Seller and that you can be sued by the Seller for the loss of bargain of the contract (subject to the Seller’s obligation to mitigate damages), which is the difference of the original sale price for the home in the amount of 1 million dollars and the resale price of the home. For example, let’s say the Seller decides to sell the home to a third party at a price of $800,000.00 1 month after your failure to close the real estate transaction. In this situation, the Seller can sue you for the difference of the loss of the bargain, which is $200,000.00 (1 million dollars (original contract price) (-) minus $800,000.00 (resale price)) together with any expenses/costs actually incurred by the Seller as a result of your failure to close the real estate transaction on the date scheduled for closing.
If you do not have the purchase money to close the real estate transaction then you will be in breach of the agreement of purchase and sale. The consequence of the breach is that your deposit amount will be subject to forfeiture by the Seller and that you can be sued by the Seller for the loss of bargain of the contract (subject to the Seller’s obligation to mitigate damages), which is the difference of the original sale price for the home in the amount of 1 million dollars and the resale price of the home. For example, let’s say the Seller decides to sell the home to a third party at a price of $800,000.00 1 month after your failure to close the real estate transaction. In this situation, the Seller can sue you for the difference of the loss of the bargain, which is $200,000.00 (1 million dollars (original contract price) (-) minus $800,000.00 (resale price)) together with any expenses/costs actually incurred by the Seller as a result of your failure to close the real estate transaction on the date scheduled for closing.
Why should You Be Liable When Real Estate Market Has Rapidly Declined?
I am sure you are asking yourself the question how can I be liable to the Seller for the deposit amount and the difference of the original contract price and resale price of the home if the reason for failing to close was as a result of the rapid decline in the real estate market?
What does the Court have to say about this? In the recent decision of Park Avenue Homes Corp. v. Malik, 2022 ONSC 973, Justice C.F. de Sa concluded at paragraph [35] as follows:
I am sure you are asking yourself the question how can I be liable to the Seller for the deposit amount and the difference of the original contract price and resale price of the home if the reason for failing to close was as a result of the rapid decline in the real estate market?
What does the Court have to say about this? In the recent decision of Park Avenue Homes Corp. v. Malik, 2022 ONSC 973, Justice C.F. de Sa concluded at paragraph [35] as follows:
“In my view, it is clear that the decrease in the value of the Property was a result of a general decline in the real estate market. By purchasing a home, the Plaintiff assumed the risk of fluctuations in the market value of the Property. Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA 282, at para. 33. A drop in the market for real estate is not unforeseeable and not a valid basis for being let out of an Agreement of Purchase and Sale. See Perkins v. Sheikhtavi, [2019] O.J. No 5993, Burkshire Holdings v. Ngadi, [2021] O.J. No. 2781, and Forest Hill Homes .v Ou, [2019] O.J. No. 3781.
In another decision of Arista Homes (Kleinburg) Inc. v. Griu, 2022 ONSC 1614, Justice R.E. Charney held at paragraph [32] as follows:
“These cases make it clear that fluctuations in the real estate market are to be expected, and fluctuations in value do not alter the obligations of either party unless there is specific language in the contract to address the issue (eg. Making the contract conditional on financing).”
Based on the Courts reasoning above, the Purchaser in our example could be liable to the Seller for forfeiture of the deposit amount and the loss of the bargain of the contract for failing to close the real estate transaction.
In another decision of Arista Homes (Kleinburg) Inc. v. Griu, 2022 ONSC 1614, Justice R.E. Charney held at paragraph [32] as follows:
“These cases make it clear that fluctuations in the real estate market are to be expected, and fluctuations in value do not alter the obligations of either party unless there is specific language in the contract to address the issue (eg. Making the contract conditional on financing).”
Based on the Courts reasoning above, the Purchaser in our example could be liable to the Seller for forfeiture of the deposit amount and the loss of the bargain of the contract for failing to close the real estate transaction.
Time for a Change - Why not apply the Doctrine of Frustration to the Contract
In order to establish frustration of the contract, the Purchaser must demonstrate that the agreement of purchase and sale is frustrated, because an unforeseen supervening event took place without the fault of either party that radically altered the contractual obligations, which made it impossible to carry out the purchase of the home. If the doctrine of frustration applies, it will relieve the parties of their contractual obligations.
A purchaser could argue that the rapid decline in the value of the real estate in the area, where the property is being purchased, is an unforeseen supervening event, which took place without the fault of either party.
It can be further argued that the fall in the value of the real estate market radically altered the contractual obligations, because the value of the home is no longer worth the value as contracted for. The Purchaser is not buying a home worth 1 million dollars anymore, but worth $800,000.00, and the Seller is not selling a home worth 1 million dollars either, but selling a home worth $800,000.00. It is submitted that effecting performance of the contract has become impossible, because the Buyer is not buying a home actually worth 1 million dollars and could not obtain the financing necessary to close the real estate transaction.
Although Court decisions have rejected the applicability of the doctrine of frustration as a defence to a decrease in the real estate market (see Bang v. Sebastian, 2019 ONCA 501); Paradise Homes North West Inc. v. Sidhu, 2019 ONSC 1600; and Forest Hill Homes v. Ou, 2019 ONSC 4332), it is this writer’s opinion that our Courts should utilize the doctrine of frustration in only “exceptional cases”, where the fall and/or rapid decline of the real estate market occurs as a result of an economic crises, such as the recent mortgage interest rate hikes by the Bank of Canada in the year of 2022 to combat economic inflation.
Further, in our example above, the real estate agent could be liable to the Purchaser for damages/losses (for instance, the deposit amount and/or difference in original contract price and resale price of home plus expenses) for not making the agreement of purchase and sale conditional on mortgage financing. The rapid fluctuations in the real estate market are of serious economic concern to every buyer. By making the sale of a home conditional on mortgage financing would avoid the legal consequences of failing to close the real estate transaction due to a falling and/or declining real estate market.
It this writer’s opinion that our law needs to adapt to the current changes in our economy and real estate market due to the consequences of economic inflation. This writer hopes that our High Court and/or Parliament intervenes to remedy the injustice and/or unfairness of the impact that the fall of the real estate market has on a Purchaser today, where a Purchaser could potentially be liable to a Seller for hundreds of thousands of dollars.
In order to establish frustration of the contract, the Purchaser must demonstrate that the agreement of purchase and sale is frustrated, because an unforeseen supervening event took place without the fault of either party that radically altered the contractual obligations, which made it impossible to carry out the purchase of the home. If the doctrine of frustration applies, it will relieve the parties of their contractual obligations.
A purchaser could argue that the rapid decline in the value of the real estate in the area, where the property is being purchased, is an unforeseen supervening event, which took place without the fault of either party.
It can be further argued that the fall in the value of the real estate market radically altered the contractual obligations, because the value of the home is no longer worth the value as contracted for. The Purchaser is not buying a home worth 1 million dollars anymore, but worth $800,000.00, and the Seller is not selling a home worth 1 million dollars either, but selling a home worth $800,000.00. It is submitted that effecting performance of the contract has become impossible, because the Buyer is not buying a home actually worth 1 million dollars and could not obtain the financing necessary to close the real estate transaction.
Although Court decisions have rejected the applicability of the doctrine of frustration as a defence to a decrease in the real estate market (see Bang v. Sebastian, 2019 ONCA 501); Paradise Homes North West Inc. v. Sidhu, 2019 ONSC 1600; and Forest Hill Homes v. Ou, 2019 ONSC 4332), it is this writer’s opinion that our Courts should utilize the doctrine of frustration in only “exceptional cases”, where the fall and/or rapid decline of the real estate market occurs as a result of an economic crises, such as the recent mortgage interest rate hikes by the Bank of Canada in the year of 2022 to combat economic inflation.
Further, in our example above, the real estate agent could be liable to the Purchaser for damages/losses (for instance, the deposit amount and/or difference in original contract price and resale price of home plus expenses) for not making the agreement of purchase and sale conditional on mortgage financing. The rapid fluctuations in the real estate market are of serious economic concern to every buyer. By making the sale of a home conditional on mortgage financing would avoid the legal consequences of failing to close the real estate transaction due to a falling and/or declining real estate market.
It this writer’s opinion that our law needs to adapt to the current changes in our economy and real estate market due to the consequences of economic inflation. This writer hopes that our High Court and/or Parliament intervenes to remedy the injustice and/or unfairness of the impact that the fall of the real estate market has on a Purchaser today, where a Purchaser could potentially be liable to a Seller for hundreds of thousands of dollars.
Anthony Rabba (Author)
Barrister & Solicitor
Barrister & Solicitor