Buyers beware as housing market cools

by | Dec 7, 2022 | Litigation, Real Estate Disputes

Cold feet can cost buyers dearly when the housing market takes a turn for the worse.

Higher interest rates and economic volatility are a recipe for falling real estate prices, and difficult market conditions are already having an effect, with the Canadian Real Estate benchmark price index dropping in September for the sixth straight month. Financial institution Desjardins recently warned that there could be further to fall, predicting the average Canadian home could lose as much as 25 per cent of its peak value by the end of 2023.

This shifting dynamic could take some getting used to for the parties to real estate deals: in the hot property market that has become the norm in Toronto, vendors are generally the ones at risk when a deal collapses — not only for the return of the thwarted buyer’s deposit, but also potentially for damages to make up the difference between the agreed price and the updated market value of the home.

I have no doubt that the new status quo will see buyers increasingly responsible for the failure to close transactions, out of fear they have overpaid or over-extended themselves financially. But getting out of a binding agreement of purchase and sale (APS) unscathed is not so simple, as the abortive purchaser of a pre-construction luxury home in the Greater Toronto Area recently discovered.

In the case of Country Wide Homes v. Cui, Ontario Superior Court Justice Susan Vella ordered the defendant to pay the plaintiff builder more than $600,000 in damages, on top of the deposit she had already forfeited after backing out of the $4-million deal.

The facts of the case

Back in March 2017, Qi Cui entered an APS for $3.96 million with Country Wide for a high-end pre-construction home. She later paid a $334,000 deposit and agreed to updates and extras that would take the final price to $4.1 million.

At the time the agreement was signed, Cui was not actually in the country, but had her broker attend with a proxy, who posed as Cui using her identification, and executed the agreement on her behalf.

A certificate of property use in the APS included details on work that had been carried out to address the effects on local river water of a historic fishery formerly used on the land where the new build was developed.

In February 2019, Cui’s lawyer wrote to Country Wide’s counsel, informing them that she did not intend to close the deal as agreed the following month and the builder eventually sold the property in December 2020 to another buyer for $3.25 million.

What happened in court?

Cui defended her non-closure on the basis that restrictions on the property’s use and environmental contamination issues were not properly disclosed to her.

However, following a hearing on the plaintiff’s summary judgment motion, the judge sided with the builder, finding that Cui had sanctioned the proxy scheme and properly entered the APS.

When it came to the allegations of misrepresentation, the judge concluded that Cui’s contentions were not supported by the evidence, adding that the APS gave her five business days to obtain legal advice on the environmental issue, and that she had had plenty of time to obtain expert evidence since the action was launched in 2019.

“It is reasonable to infer…that she did not, because she could not find any expert who was able to support her position,” Justice Vella wrote.

The calculation of damages was relatively straightforward, because of the lower offer the developer accepted for the house, which came in $850,000 below Cui’s agreed price. The judge disallowed the company’s claim for interest charges on the missing funds, but approved damages for other carried costs, including broker fees, property tax and maintenance.

After accounting for Cui’s deposit, which had already been seized by Country Wide, that left total damages of $623,500 owing by Cui.

Buyers must exercise caution in cooling market

An APS is a binding contract that should not be entered into lightly. Unfortunately, this fact comes as a surprise to many first-time buyers.

In a cooling real estate market, purchasers should feel less pressured to move quickly, and may want to take a more cautious approach to their offers, since without competition from multiple bidders, it makes less sense to waive conditions.

In fact, purchasers can engineer themselves a little wiggle room by making an offer conditional on obtaining financing, just in case a sudden interest-rate hike stops them from qualifying for a mortgage large enough to support their offer. Getting pre-approved for a mortgage can also help buyers get a better sense of their comfort level in terms of the size of the loan and repayments required without committing themselves to anything.

For vendors, the decision is the latest in a long line supporting the idea that deposits may be forfeited to them in the event of a buyer’s failure to close.

In hotter real estate markets, this argument may be harder to make, since it is more difficult to prove damages when there is a chance the property could be sold for even more money to another buyer. However, in down times, mitigating damages by proceeding with a sale at a lower price makes it easy to demonstrate losses, and may make the claim even more suitable for summary judgment.