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Realty Default

Posted on June 1, 2020 | Posted in Lawyers' Issues, Real Estate

Real estate default cases keep coming. The issues are often the same: who breached, who was ready willing and able to close, was repudiation accepted, what happens to the deposit?

A key being placed in a hand.

Azzarello

The case of Azzarello v. Shawqi 2019ONCA820 had all of the issues, as well as an unusual one dealing with the deposit. Purchaser was unable to close the transaction and requested an extension, which was given. On the extended closing date, purchaser requested a further extension. Vendors agreed, but on terms that, if not met, purchaser would be in default of the agreement. Purchaser did not respond. Vendors did not tender. Ultimately, vendors re-sold the property at a significant loss.

The motion judge awarded damages of $309,000 and allowed vendors to retain purchaser’s $75,000 deposit.

Appeal

The Ontario Court of Appeal confirmed that, because purchaser did not have funds and took no steps, to close (and, we suggest, was also warned by vendors that failure to close would be a breach), vendors did not need to tender. In this case, vendors were ready, willing, and able to close the transaction on the extended closing date.

Purchaser had also claimed that vendors did not mitigate their damages. He argued that vendors ought to have accepted his offer to purchase the property for a 10% reduction in the purchase price. The Court held that the duty to mitigate does not oblige a vendor to accept an offer from a defaulting purchaser for less than the agreed price and then have to sue the purchaser for the shortfall.

Deposit

The Court reiterated rules set out in previous cases relating to the forfeiture of deposits and the purpose of a deposit:

“The deposit stands as security for the purchaser’s performance of the contract. The prospect of its forfeiture provides an incentive for the purchaser to complete the purchase. Should the purchaser not complete, the forfeiture of the deposit compensates the vendor for lost opportunity in having taken the property off the market in the interim, as well as the loss in bargaining power resulting from the vendor having revealed to the market the price at which the vendor had been willing to sell.”

The Court held that when an agreement only calls for the deposit to be credited to the purchase price on completion, the measure of damages is based on the difference between the purchase price and the ultimate lower sale price. Accordingly, the agreement intended that the deposit be applied to the purchase price whether received on completion or as damages. An innocent vendor does not get the same money twice. The Court credited the deposit against the damages.

Gao

Sometimes forfeiture of the deposit is the only real issue in dispute in real estate breach cases. Such was the situation in Gao v. Khan 2019ONSC5604.

Purchaser was unable to complete the purchase agreement. He attempted to negotiate a new deal with vendors, including offering to enter into a new agreement with a lower purchase price and agreeing to forfeit $10,000 of his $65,000 deposit. He then advised that he was willing to pay an extra $40,000 for the purchase of the property if his deposit of $65,000 were not forfeited. Vendors refused both offers.

Purchaser first complained that vendors ought to have negotiated his new offers in good faith. The motion judge would have none of that. An obligation of good faith does not mean that vendors must accept an offer for less money than the vendors are seeking. Why would they release their claim to forfeit the purchaser’s deposit of $65,000 if to do so would result in a $25,000 loss?

Ultimately, vendors re-sold the property for only a $5,000 loss. They made no claim for damages; they merely requested forfeiture of purchaser’s deposit. The judge noted that the deposit was not disproportionately large and there was no evidence of inequality in bargaining power or oppression or any other badge of unconscionability. The judge granted forfeiture of the purchaser’s deposit.

 

Image courtesy of Tumisu.

Jonathan Speigel

 

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.

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