When a buyer backs out of a real estate deal, the seller may be entitled to damages, but proving the buyer was responsible for the failed transaction is only part of the battle.
Sellers must also take reasonable steps to mitigate their losses, typically by re-listing the property and finding a new buyer. If the property ultimately sells for less, the original buyer may be liable for the difference.
But how a seller goes about that resale matters. An inadequate effort to mitigate losses can significantly reduce, or even derail, a damages claim, as one property developer recently discovered.
In Eyelet Investment Corp. v. Zhou, the Court of Appeal for Ontario upheld a motion judge’s ruling summarily dismissing the new-build construction company’s claim on the basis that it failed to take reasonable steps to mitigate its damages.
The facts
The case began in September 2017, when the defendant backed out of an Agreement of Purchase and Sale (APS) for a newly constructed home, just weeks before the $1.68 million deal was scheduled to close. Treating the move as an anticipatory breach of the APS, the builder eventually resold the property six months later for $1.3 million, $380,000 less than the original deal.
The vendor sued the original buyer for the lower amount of $250,000, taking into account their forfeited deposit.
On a summary judgment motion brought by the developer, the abortive buyer argued that the company had failed to meet its mitigation obligations, noting that the property was never re-listed on the MLS. The company also could not provide evidence of its marketing efforts for the specific property at issue, relying instead on its typical practice, which included email blasts to past interested buyers and real estate agents, as well as billboard advertising.
In these circumstances, the motion judge declined to set the resale price as the true measure of the property’s value and instead used the date of the APS’s termination. Based on the vendor’s valuation for that date, which set the fair market value at $1.55 million, the motion judge found that the seller had suffered no damages, since the previously forfeited deposit covered the loss.
The results
On appeal, the developer argued that the motion judge had reversed the onus by effectively forcing it to prove that it had mitigated its damages, when in fact the burden of proof is on an abortive buyer to show that its mitigation efforts fell short.
However, the unanimous three-judge panel disagreed, finding that the motion judge’s conclusions were entitled to deference and that she was within her rights to find that the original buyer had met her burden to show that the company’s mitigation efforts failed.
The Appeal panel also rejected the developer’s argument that once the motion judge found the mitigation evidence lacking, it was no longer appropriate to deal with the issue on summary judgment, noting that both sides had previously agreed to have the matter dealt with summarily.
“The fact that the appellant may have failed to put its best evidentiary foot forward does not retrospectively make proceeding by summary judgment inappropriate,” the decision reads.
The lessons
This decision is a particularly timely one for buyers and sellers dealing with the fallout from Toronto’s cooling condo market. The resale price crash has sparked a recent rash of failed closings by buyers who feel like they can no longer justify the APS price they agreed to years ago in more optimistic times.
These abortive buyers should be aware that an APS is a binding contract and that breaching one could have serious consequences. Although the defendant came out on top in this case, it’s important to remember they had already lost their deposit.
Meanwhile, property developers tempted to delay promoting resale properties to avoid flooding the market or depressing prices should know this strategy carries risks. If they want their mitigation efforts to survive a challenge by an abortive buyer, this decision suggests that they will benefit from keeping records of their marketing efforts for the specific property at issue.