A recent decision of the Ontario Court of Appeal examined a failed real estate deal, and the purchaser’s claim for a loss of bargain when they were required to pay significantly more for the property than the original Agreement of Purchase and Sale had contemplated. The trial judge found that the purchaser was entitled to a return of their original deposit, while the ONCA held that the purchaser was entitled to the full difference in the purchase price. This case could have significant implications with respect to damages for parties who fail to close on a real property transaction in Ontario going forward.

What Happened?

The case involved a failed real estate transaction in the city of Toronto.

The vendors had purchased the property in 1989, thinking they might develop it into a nursing home. However, it was uninhabitable at the time of purchase and it remained in that state throughout their 37 years of ownership.

In May 2016, the buyer agreed to purchase, and the vendors agreed to sell, the property for $500,000. The agreement provided for a closing date of August 31, 2016.

The closing date was extended seven times over some 18 months and the final closing date was set for April 7, 2017.

However, the property was encumbered by a mortgage. The mortgage was registered in September 1989 as security for a loan of $250,000 with interest at the rate of 12% per annum.

Extraordinarily, the vendors had not made a mortgage payment in over 20 years prior to signing an agreement of purchase and sale.

Eventually, it was established that the vendors could not successfully negotiate a discharge of the mortgage and they conceded that they could not convey a clear title to the purchaser. They proposed that the purchase contract be terminated by mutual releases and that the deposit be returned to the purchaser.

Instead, the buyer almost immediately closed a power of sale agreement with the mortgagee at a sale price of $687,500. This transaction did not involve the vendors directly.

The purchaser then sought summary judgment in the amount of $187,500 from the vendors as damages for loss of bargain.

Lower Court Decision

The motion judge found that the vendors could not deliver unencumbered title as they had promised in the Agreement of Purchase and Sale, and were therefore in breach of the agreement with the buyer.

The motion judge acknowledged that the vendors’ breach gave rise to a claim for damages.

However, she limited the damages to the amount of the deposit ($25,000) and refused to award damages to the buyer for loss of bargain, stating:

“The remedy of damages for a breach of contract causing a loss of bargain presupposes that there was a bargain to be had and that it was wrongfully withheld from the innocent party. For [the buyer], the economic consequences of this failed agreement of purchase and sale caused the illusion of a loss of bargain but no actual loss of bargain. […]

In summary, there was no wrongful appropriation of a benefit by the [vendors]. The benefit that [the buyer] assumed it was denied was illusory and did not in fact exist. Accordingly, the [vendors] have no liability to [the buyer] for loss of bargain.”

The buyer appealed the decision.

Court of Appeal Decision

While the Ontario Court of Appeal agreed with the motion judge that there was a breach of the Agreement of Purchase and Sale because the vendors could not deliver unencumbered title as they had promised, they did not agree with her other conclusions.

Specifically, the court disagreed that there had been an “illusion” of a bargain between the buyer and the vendors. It found that there was, in fact, a real bargain, stating:

“There was an agreement to sell the property at an agreed-upon price. When the [vendors] did not close the transaction, despite several extensions, the [buyer] lost the benefit of that agreement.”

The court disagreed with the motion judge that, as a condition of recovering damages for the difference in the price agreed upon with the vendors and the higher price eventually paid to the mortgagee, the buyer was required to show that the vendors “appropriated the benefit” otherwise available to the buyer. It stated that the damages for the loss of benefit were to be measured by the higher price paid by the buyer for the property and were not dependent on any benefit that may have flowed to, or been bestowed upon, the vendors.

As a result, the court allowed the appeal and found that the buyer was entitled to judgment for the difference between the purchase price agreed upon and the price eventually paid for the same property, which amounted to $187,500. The return of the $25,000 deposit was maintained.

Get Advice

There are significant legal and financial risks in entering into a residential 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. As demonstrated by the case outlined above, this can result in significant legal ramifications.

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 residential 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.