Su v. Hoang, 2017 CanLII 146584 (ON SCSM)
A real estate transaction can unravel for many reasons, but when a purchaser refuses to close after signing a firm Agreement of Purchase and Sale, the consequences can be significant. A recent Small Claims Court decision, Su v. Hoang, 2017 demonstrates the importance of properly understanding financing and inspection conditions, deposit provisions, and the risks assumed when conditions are waived.
The Failed Transaction
The Sellers, Zhi Tong Su and Shao Ping Chen, entered into an Agreement of Purchase and Sale with the purchaser, Sieu Khin Hoang, for a Scarborough property.
The purchase price was $450,000. The purchaser paid:
- a $15,000 deposit upon signing the Agreement of Purchase and Sale, held by Tradeworld Realty Inc.; and
- an additional $5,000 deposit to the Seller’s lawyer when the closing date was extended.
The purchaser requested an extension of the closing date because of delays in obtaining mortgage financing. As part of the extension agreement, the purchaser also agreed to pay the Sellers $2,000 in compensation.
Despite the extension, the transaction did not close. The Sellers were ready and able to complete the transaction, but the purchaser refused to proceed.
The Sellers commenced a claim seeking:
- forfeiture of the $20,000 deposit;
- payment of the agreed $2,000 extension compensation; and
- recovery of legal expenses arising from a previous Superior Court action commenced by the purchaser, which was later dismissed for delay.
The purchaser counterclaimed, seeking the return of his deposits.
The Purchaser’s Argument: Problems With the Property
The purchaser argued that he was justified in refusing to close because the condition of the property had deteriorated after the Agreement was signed.
He claimed there had been a serious basement flood before closing that caused:
- water damage;
- electrical issues; and
- foundation problems.
The purchaser argued that the Sellers had failed to disclose the flood and that his mortgage financing was refused because of the property’s condition.
He relied on the provision in the Agreement of Purchase and Sale stating that the property remained at the seller’s risk until completion.
The Court Finds the Purchaser Knew About the Property Issues
The Court rejected the purchaser’s position.
Before signing the Agreement, the purchaser had already been made aware that the property had issues. His own home inspector identified several concerns, including:
- possible foundation problems;
- basement dampness;
- electrical concerns; and
- the need for further investigation by a qualified professional.
Despite these concerns, the purchaser proceeded with the transaction and later waived both the:
- financing condition; and
- home inspection condition.
The Court found that by waiving these conditions, the purchaser accepted the risk associated with proceeding with the purchase.
Once the conditions were waived, the Agreement became a firm and binding contract.
The Alleged Flood Was Not Proven
A key issue before the Court was whether a serious flood occurred after the Agreement was signed and whether that event justified the purchaser’s refusal to close.
The Court found that the purchaser failed to prove that a new flood occurred between the date he waived conditions and the closing date.
Although there was evidence of water-related concerns at the property, those concerns existed before the purchaser waived the conditions.
The Court also gave limited weight to the mortgage denial evidence because no representative from the lender or mortgage company testified to explain the reasons for refusing financing.
The Real Reason the Transaction Failed Was Financing
An important factor in the Court’s decision was the purchaser’s own testimony.
The purchaser admitted that if he had obtained financing, he would have proceeded with the purchase despite his concerns about the basement.
The Court concluded that the real reason the transaction failed was the purchaser’s inability to obtain financing, not a proven change in the condition of the property.
The Court held that the purchaser had assumed the risk of financing after waiving the condition.
The Deposit Was Forfeited to the Sellers
The Court ordered that the purchaser’s entire $20,000 deposit be forfeited to the Sellers.
The Court ordered:
- the $15,000 deposit held by Tradeworld Realty Inc. to be released to the sellers; and
- the $5,000 additional deposit held by Jack F.S. Lee (the Sellers’ lawyer) to be released to the Sellers.
The Court also awarded prejudgment interest on those amounts.
The purchaser argued that forfeiture was unfair because the sellers were able to sell the property shortly after the failed transaction and did not suffer significant financial loss.
The Court rejected that argument, finding that the forfeiture was not unconscionable.
The Court considered the surrounding circumstances, including that:
- the purchaser knew the property had issues;
- the purchaser obtained an inspection report identifying concerns;
- the purchaser waived his conditions;
- the sellers were prepared to close; and
- the purchaser ultimately refused to complete the transaction.
The $2,000 Extension Payment Was Also Awarded
The Court also awarded the sellers the agreed $2,000 compensation payment for extending the closing date.
The purchaser had requested additional time to complete the transaction, and the parties had agreed that the extension would be provided in exchange for that payment.
Legal Fees Were Not Awarded
The Sellers also sought recovery of legal fees incurred in defending a previous Superior Court action commenced by the purchaser.
That action was later dismissed for delay.
The Court declined to award those costs in this proceeding, holding that any costs relating to that litigation had to be addressed within that separate court file.
Lessons for Buyers and Sellers
The decision in Su v. Hoang provides important guidance for Ontario real estate transactions.
For purchasers, the case highlights the risks of waiving conditions. A Buyer who removes financing and inspection conditions cannot later rely on those same concerns as a reason for refusing to close.
For Sellers, the decision confirms that a deposit is not automatically returned simply because a purchaser encounters financing difficulties. Where a purchaser breaches a firm Agreement of Purchase and Sale, the deposit may be forfeited.
A deposit serves an important purpose: it demonstrates the purchaser’s commitment to completing the transaction and provides security to the Seller if the purchaser defaults.
When a Buyer signs a firm Agreement of Purchase and Sale, careful consideration must be given before waiving conditions. Once those protections are removed, the consequences of failing to close can be substantial.
Brian Madigan LL.B., Broker
www.OntarioRealEstateSource.com