The Buyer runs into a little bit of difficulty and cannot close on the purchase. That’s fine, the market tumbled unexpectedly and they ran into difficulty.
It’s reasonable to pay damages which relate to the failed purchase. The Seller obviously had some problems and suffered some losses.
However, what about deal number two? Should that be part of it, as well?
If the Seller bought and can’t close on their purchase, should their Buyer have to pay on two separate and distinct real estate deals?
Actually, legally the Purchaser is obligated to pay for the foreseeable damages, and the damages flowing from the second deal (the Seller’s purchase) were “reasonably foreseeable in the circumstances.
Here’s what the Ontario Court of Appeal said on 14 June 2019 in Bang v. Sebastian:
“There was evidence that the respondents (the Sellers) were buying a new home and, in our view, it was reasonably foreseeable that there would be finance and carrying expenses related to that purchase.”
So, here’s the issue: why should the Buyer pay for both?
In some cases, the Seller is “cashing out” for $1 million and putting the money in the bank, and in other cases, the Seller is cashing out and buying a $2 million or $3 million place.
In the first case, we are looking at Bank interest for a couple of months on the closing funds, that’s the first deal.
But, how much did the Buyer really know about deal #2, or that, just as easily as it might have been a $2 million property, it could have been $3 million?
The best person to insure against this loss really is the Seller, as opposed to the Buyer.
Amend the Contract
If you are on the buy side and you have an opportunity to limit the damages, perhaps you should:
- Limit the damages to the first deal alone,
- Cap the damages on the first deal to 6 months interest on the outstanding balance,
- agree that the deposit amount is the full claim for damages,
- Specifically exclude any related damages flowing from deal #2.
If such a clause were normally included in a standard form Agreement, then the risk of such a loss would shift from the first purchaser (often, first time homebuyers) to the Seller (a trade-up purchaser) who is likely in a better position to plan for any potential problem.
Right now, if anything goes wrong, ie. the market suddenly plunges by 25% (Spring 2017 or by almost the same in the Spring of 2022) then the first purchaser, just struggling to buy something at the low end of the housing spectrum, gets stuck with the damages on their own deal, and the Seller’s purchase too. That doesn’t seem fair.
Brian Madigan LL.B., Broker