Date: October 19, 2020
Let’s say, you have a real estate closing scheduled for tomorrow. You are the Purchaser in the real estate transaction of a property with a purchase price of $1,000,000.00. The day before closing, however, your mortgage broker contacts you and tells you that the mortgage funds will not be available for one more week to fund the deal. Therefore, you will not be able to close the transaction for tomorrow.
Failure to Close the Real Estate Transaction
A failure to close on the closing date results in a violation of the Agreement of Purchase and Sale (hereinafter “APS”). The ramifications of such a breach are as follows:
A failure to close on the closing date results in a violation of the Agreement of Purchase and Sale (hereinafter “APS”). The ramifications of such a breach are as follows:
i. You can lose the deposit that you provided for the purchase of the home; and/or
ii. You can be sued by the Seller for thousands and thousands of dollars for not closing on time.
What should you do when faced with a situation that you are not able to close the real estate transaction on the closing date?
Your real estate lawyer should be prepared to seek an extension for one or two weeks of the closing date from the Seller’s lawyer. If such an extension is sought, two things could happen:
i. The Seller can refuse, which means that the real estate deal is at end, and the Seller is free to sue for the deposit and additional damages/losses as a result of failing to close; or
ii. The Seller can agree to an extension, but on certain terms and conditions such as:
a. Providing a further deposit in the sum of $20,000.00;
b. Paying the per-diem costs of the mortgage on the property until the extension date;
c. Paying the maintenance costs of the property until the extension date; and
d. Paying the Seller’s lawyers legal fees for the extension.
The Seller agreeing to an extension is exactly what you should want, but it is advised that negotiating the extension terms and conditions would likely be more advantageous financially, for instance, providing only $2,500.00 deposit for an extension instead of $20,000.00.
How to Avoid the Failure to Close
It is very important that you be ready, willing and able to close the real estate transaction in order to avoid being found in breach by the Seller and subject to huge costs and damages/losses.
At the outset, your real estate agent should include a provision in the APS allowing for one or two extensions to avoid a situation, where you are not able to close the transaction on the closing date.
Furthermore, you should have back up funding in place from either a primary or secondary lender or even a family member or friend to assist with funding the transaction on the closing date.
If litigation is Pursued
Litigation is an unwanted consequence of the failure to close the real estate transaction. The best way to avoid litigation is to see if the Seller is willing to enter into a mutual release, where upon forfeiture of a certain sum of money (such as the deposit amount), the parties will release each other from any and/or all claims in relation to the property for the failure to close the real estate transaction.
In the example above, the mortgage broker is liable for its failure to fund the mortgage transaction on the closing date. Consider retaining litigation Counsel to send a letter to the mortgage broker arguing their failure to fund the deal, and its liability in this respect. If litigation is pursued against you by the Seller, seek the amount of damages that are brought against you from the mortgage broker through the commencement of a Third Party Claim. You would not have been the subject of litigation, but for the mortgage broker's failure to fund the deal.
Conclusion
For a first-time home buyer, being involved in a situation, where you are not able to close on the closing date is extremely worrisome and stressful. Seek the required amendments to the APS at the outset and make sure you have back up mortgage funding in the event that your mortgage broker is not able to fund the deal on the closing date. These very things can avoid a lawsuit that could potentially cost you huge financial hardship.
Anthony Rabba (Author)
Barrister & Solicitor
Barrister & Solicitor