In a recent Court of Appeal decision, a court found that a buyer’s inability to sell her home did not give her permission to back out of her agreement to buy another property.

What Happened?

A couple listed their home for sale in March 2017. The buyer made an offer to purchase the home on April 3, 2017. There were thirteen offers to purchase the home. The buyer’s offer was the second highest and was accepted by the couple.

The terms of the offer included a purchase price of $1,871,000 and a deposit of $80,000 to be held in trust by the realtor until the closing scheduled to take place on July 10, 2017. The offer was unconditional.

After the unconditional offer was accepted but before closing, the government of Ontario made a policy announcement relating to taxation. As a result, real estate prices in the area dropped 20 to 30 per cent.

On the day of closing, the buyer advised that she could not close, as she had been unable to sell her own home and could not obtain sufficient mortgage financing.

As a result of the failure to close, the couple put the property back on the market and it sold for $1,251,888. This was $619,112 less than the buyer had agreed to pay.

The couple commenced legal proceedings against the buyer seeking:

  • $619,112, being the difference between the amount the buyer had offered and the amount the property later sold for; and
  • carrying costs of the property between July 10, 2017 and the sale of the property.

The buyer opposed the motion for summary judgment claiming that the government announcement frustrated the agreement. She also brought her own motion seeking return of the deposit.

Lower Court Decision

The motion judge found that the doctrine of frustration did not apply in the circumstances, stating:

“Though I can agree that there was a “supervening event”, that is the announcement of the policy by the provincial government at the time, I do not find that this event was “a radical change in obligation” to force the defendant “to do something radically different from what the parties agreed.”

The judge therefore ordered the buyer to pay $619,112 and carrying costs in the amount of $4,621.

The buyer appealed.

Court of Appeal Decision

The court began by explaining that frustration applies to contracts including real estate transactions, and would apply if a supervening event had altered the nature of the buyer’s obligation to contract with the couple to such an extent that to compel performance despite the new and changed circumstances would be to order the buyer to do something radically different from what the parties agree to under their contract.

The court stated that, while there was a supervening event (the announcement of a new government policy), the supervening event did not constitute frustration of the agreement, as the announcement was not such that performance of the contract became a thing radically different from that which was undertaken by the contract. It explained that a contract is not frustrated if the supervening event was contemplated by the parties at the time of contracting and was provided for or deliberately chosen not to be provided for in the contract.

In this case, the court found that the buyer deliberately chose not to include a condition that she had to be able to sell her home and obtain mortgage financing before closing as a term of her offer to purchase. Instead, the court found that the buyer should reasonably have known there was a risk her home would not sell at the price she sought but made an unconditional offer to purchase the couple’s home because she wanted her offer to be accepted (although she was not the highest bidder).

As a result, the court dismissed the appeal.

Get Advice

There are significant legal and financial risks in entering into a real estate transaction. Such large purchases should not be made without proper guidance from an experienced lawyer. Without sound legal advice, you could end up paying more than you should for your home, or accept an offer that is too low, or worse yet, end up with a transaction that falls through due to missed paperwork, or details and technicalities that go unnoticed.

At DBH Law in Calgary, our real estate lawyers have more than 25 years of combined experience acting for purchasers, lenders, and developers through all stages of real estate transactions.

We help our clients avoid huge areas of risk, including poorly drafted or incomplete agreements of purchase and sale, hidden fees, encroachment or easement issues, complex concerns like properties held in trust, and similar pitfalls. We also look for contract language which may impose unfavourable duties or obligations. To learn more about how we can help, contact us online or by phone at 403.252.9937.