Breaching an agreement of purchase and sale (APS) does not automatically terminate the real estate deal.
In Toronto’s pre-construction condo and townhouse market, collapsed real estate transactions are an increasingly common sight as over-stretched buyers realize they can no longer afford to complete deals agreed to months or even years ago at the height of the condo boom.
In many cases, this kind of default leaves at-fault buyers exposed to significant risk, not only for the forfeiture of their deposit, but also potentially for damages to make up the difference between the originally agreed price and whatever new amount vendors can muster in the current condo market.
But before developers can sell the unit to a new buyer, they must ensure the original deal has been terminated. That was the issue at the heart of the recent case of Caivan (Creekside) Limited Partnership et al. v. Logoteta et al.
The facts
According to Ontario Superior Court Justice Paul Schabas’ ruling, the buyers in the case — a couple based in England — originally agreed to buy a pre-construction townhouse from a developer for $3.3m in June 2022, ahead of a planned move to this country.
With an anticipated occupancy date of July 2024, the APS required a series of deposits as construction progressed and the buyers made early payments totalling $100,000, before warning the developer they would not be able to pay a further $262,000 due in the fall of 2022.
In a November 2022 letter, the developer said that if the payments were not made within two days, they would “move to terminate the Purchase Agreement and all deposits paid shall be forfeited,” but added that they would be “willing to consider in good faith reviving the transaction” at a later date if they became able to make the payments and the house remained available.
No further payments or correspondence were exchanged between the parties until March 2023, when the developer agreed a fresh deal with a new buyer for $2.9m and sued the U.K.-based couple to recover the difference. In response, the original buyers claimed that the new deal was a breach of their APS, which they believed was still in force, and requested the return of their deposit, along with damages.
The results
After a one-day hearing on competing motions for summary judgment, Justice Schabas ruled in favour of the original buyers. Although he found that they had committed an anticipatory breach of the APS by informing the developer of their inability to make the scheduled deposit payments, the judge added that such a repudiation does not amount to termination of the contract.
Instead, he explained that an innocent party faced with an anticipatory breach has the choice between treating the contract as remaining in force or accepting the termination.
Citing case law that indicates the choice to terminate must be communicated “clearly and unequivocally” to the party in breach, the judge found that the developers had fallen short.
“They did nothing. The breach was unaccepted, and the agreement was not terminated,” Justice Schabas wrote.
Having found that the APS was not terminated, the judge went on to say that the developer should not have resold the property to a new buyer.
“The plaintiffs were the innocent party in November 2022, but that position was overtaken by the resale in March 2023, which put the plaintiffs in the position that they could not perform the contract when the defendants came back in May 2023 seeking to resume performance. As put in the case law, ‘the tables had turned’ and now the plaintiffs were in breach,” Justice Schabas wrote, ordering the developer to return the couple’s $100,000 deposit, with pre- and post-judgement interest.
The lessons
In contractual matters, as with so many areas of life, communication is key.
In a cooling real estate market, sellers are in a strong position when a prospective buyer seeks to renege on an agreed deal. Following an anticipatory breach of an APS, it may seem obvious that the deal is dead, but the onus remains on the innocent party to confirm the termination “clearly and unequivocally” to the other party before trying to resell the property to a new buyer.