No one enters into a real estate transaction with the intention of not fulfilling their obligations, but in the current market, the best of intentions only go so far. A deal is a deal until it collapses and, unfortunately, it is becoming all too common that deals meet this end.
In many cases today, purchasers try to avoid their obligations to complete because they are unwilling or unable to finance the transaction. A better deal may be available, or the buyer may simply want to invest their money elsewhere. In other cases, there may be legal reasons for not wanting to complete, such as discovering new information about the property. Litigation often ensues, and both parties invariably claim entitlement to the deposit, damages, or both.
When a real estate deal collapses, the stakes can be high: deposits can be large and there can be additional damages. For example, in a recent Supreme Court of B.C. decision, Reliance Properties (Coal Harbour) Ltd. v. Austin, 2013 BCSC 1056, a buyer chose not to complete, alleging that the seller of a pre-sale condominium unit had failed to comply with the Real Estate Development Marketing Act, entitling the buyer to avoid the contract. Specifically, the buyer alleged that the seller had not provided a disclosure statement as required by the act. The court disagreed. The buyer’s assertion was inconsistent with both the seller’s standard practice of providing such disclosure and the buyer’s prior acknowledgment of receipt. The seller was awarded the deposit, plus damages, for a total of $753,000.
When faced with a buyer who doesn’t intend to complete, a seller should proceed carefully. Any indication that the buyer is trying to avoid their obligations under the contract must be examined critically. Letters are often exchanged The parties often exchange letters that have been carefully phrased to avoid taking a committed position, and sometimes the buyer will try to force the seller to elect to terminate the contract. The seller should only make this election where a buyer has unequivocally indicated that they will not complete or has otherwise breached the contract in a fundamental way. A “without prejudice” or “off the record” statement will likely be insufficient grounds to terminate.
An election by a seller to terminate that is made without a proper foundation can be fatal. A recent example is Malek v. Tanbakookar 2012 BCSC 1742. In this case, a buyer was unable to obtain the necessary financing to complete. The buyer informed the sellers on the eve of closing that the buyer could not complete and, almost immediately, the sellers elected to terminate the contract, keep the deposit and claim damages. But when this occurred, the sellers were not ready, willing or able to complete. The sellers were not in Canada and were relying on their solicitor to sign the transfer documents, which the solicitor did, under authority of a power of attorney. Unfortunately, the power of attorney was defective, which rendered the transfer documents incapable of being filed with the Land Title Office on the closing date. In these circumstances, the seller’s election was wrongful and, as a result, the buyer was awarded the deposit.
Given the high cost of litigation and the significant risks associated with an adverse judgment, parties to collapsing real estate deals are well advised to carefully and critically examine their underlying contract and related documents before they commit to a position. If there is uncertainty, the best course may be to elect to keep the contract alive. This election can be revisited at a later date after having had the opportunity carefully evaluate options and risks. While there may be risks inherent in any decision, sellers and buyers should know those risks and make informed choices as to how to proceed.
Matthew Swanson (left, 604-632-3474; email@example.com) and Rob Davis (right, 604-632-3527; firstname.lastname@example.org) are commercial litigation lawyers in the Vancouver office of Borden Ladner Gervais LLP. This article is for information purposes only and may not be relied on as legal advice..