Where a Vendor and Purchaser of real estate enter into an Agreement of Purchase and Sale (“APS”) in Ontario (typically on an OREA Form 100) a binding contract is entered into between the parties subject to the satisfaction of conditions, if any, that are negotiated and contained in the APS. Common conditions included in an APS are making the agreement conditional on the buyer obtaining financing or conditional on an inspection.
When purchasing a property, a buyer must ensure that they will be able to advance the funds on closing date to the vendor. In order to do so, the purchase price for the property is typically comprised of a down-payment and bank financing. The financing component of the purchase price can amount to upwards of 95.0% of the purchase price of the property. Where a purchaser is only able to put down less than 20.0% of the purchase price, they are require to secure mortgage loan insurance through Canadian Mortgage Housing Corporation or Genworth Financial. Mortgage loan insurance enables purchaser to secure a property with as little as 5.0% of the purchase price put down. For instance, you could purchase a $500,000 property with only $25,000.00 down if you are able to secure a high-ratio mortgage with loan insurance.
Anyway, back to the financing clause in the Agreement of Purchase and Sale. Ideally, all purchasers would include such a condition in an Offer to Purchase real estate; however, in some highly competitive markets such as the GTA, a vendor will favor on offer that does not include any conditions. The financing clause gives the buyer the right to take time to arrange a mortgage and ensure that a lender will provide a mortgage commitment to them based on the purchase price of the property. On occasion, lenders will appraise the value of a property at an amount below the purchase price in the APS; and accordingly, they will not loan against the full value of the property as bargained for. In these cases, the buyer be unable to obtain satisfactory financing to purchase the property. In other cases, the buyer may have a poor credit score, limited income, or few assets, all of which combined may be a poor covenant for the bank or private lender, resulting in a refusal to advance funds. As such, the financing condition permits the buyer to void the APS without penalty, and their deposit to be returned.
Damages without any Conditions
If your APS does not include any conditions (i.e., financing, inspection, or otherwise), and you are unable to close on the purchase of the property, this will result in damages. The defaulting buyer will at minimum be required to forfeit their deposit to the seller. In addition, if the seller is unable to re-sell the property in a timely manner, they may incur additional expenses (i.e., property tax, utilities, mortgage payments) that would not have been incurred but for the breach of the contract by the buyer. And while the seller has a duty to mitigate their damages (i.e., re-sell the property at the highest price possible), in some case, the market may have turned, or no other suitable buyers are seeking the property at the same price as the defaulting buyer. If the property is resold at a price less than the original purchase price (with a credit for the forfeited deposit), then the buyer may be liable for damages on account of the capital loss suffered by the vendor.
This discussion solely relates to the breach of an Agreement of Purchase and Sale for a residential property that is non-income producing and is the principal residence of the vendor. For commercial or other investment type property, various implications may result from a breach of contract that have not been touched upon, including tax issues, non-capital losses, and otherwise. It is important to consult legal counsel to avoid these issues from arising in the first place; but if they do, a real estate litigation lawyer will be of great assistance.