Consider the following scenario…

A buyer makes an unconditional offer to purchase a property for $2,000,000, and that offer is accepted.

Three months pass, and the the closing date is here!

Unfortunately, the buyer is unable or unwilling to close.

A week passes, then another.  Then a month.  Eventually, the sellers realize that this buyer really, truly is not going to close, and they take steps to mitigate.

The market has softened significantly and they are only able to sell for $1,700,000.

The buyer then sues the seller for the $300,000 difference, plus costs.

Pretty cut-and-dry, right?

I wrote about this at length last year:

June 29th, 2022: “What Happens When A Buyer Doesn’t Close?”

In this blog post, I summarized a few court cases that proved, once and for all, that if a buyer simply decides to walk away from a firm purchase, and the seller re-sells the property for less, then that original buyer is liable to make up the difference.

Let me summarize one again here:

“Madison Homes v. Yiman Shi, 2020”

The buyer signed an APS for $1,717,224.57 on October 11th, 2016, and this transaction was scheduled to close in November 9th, 2018.

The buyer reneged.

The seller re-sold the property for $1,242,964.11 on May 24th, 2019.

The seller sued the buyer for $353,582.28, which was the amount due on closing, plus costs, minus the initial $100,000 deposit.

On December 1st, 2020, a summary judgment was granted in the full amount of $353,582.28.

The judge refused a trial.

He granted a summary judgment.

Here’s a highlight of the decision:

The defendants do not dispute liability.  They admit that the scheduled closing date was October 30, 2018, that there was an extension until November 9, 2018, that the plaintiff was ready, willing and able to close, and that the defendants did not close.  However, they argue that there are genuine issues as to damages and mitigation which requires a trial.

I find that there is no genuine issue requiring a trial. The defendants are required to put their best foot forward and yet have led no evidence to dispute the damages or to put into question the plaintiff’s mitigation efforts.

We have now seen a lot of these cases play out in court and the conclusion is: if a seller spends the time, effort, and money necessary to get to court, he or she will prevail in the end.

And that seems fair, right?

A buyer can’t simply expect to walk away from a contractual obligation, especially when the other party in the agreement – the seller, suffers a financial loss, right?

But let’s throw another wrench into this, just because we can, thanks to this recent appeals court ruling.

What happens to a buyer’s deposit if that buyer walks away from a firm sale, but, the seller re-sells the property for more money?

Let’s say that a house sells for $2,000,000.

The deposit is $125,000.

The buyer is “unable or unwilling to close” and the closing date passes.

A week passes, then another.  Then a month.  Eventually, the sellers realize that this buyer really, truly is not going to close, and they take steps to mitigate.

The market has strengthened significantly and they are able to sell for $2,200,000.

The buyer sees this on MLS and contacts the listing brokerage to release their initial deposit.

The listing brokerage refuses.

Now what?

Let’s go back to the concept of “fairness,” shall we.

If it’s “fair” for a seller to keep the deposit and sue for the difference in sale price when a buyer refuses to close, and the property sells for less, then wouldn’t it be “fair” for a buyer to expect the return of their deposit if the property sells for more?

No.

It wouldn’t be.

At least, that’s what the courts have now held.

The Ontario Court of Appeal recently released THIS ruling in Rahbar v. Parvizi, 2023, which I want to examine today.

Here is what happened:

On December 14, 2021, one day before the sale was to close, the buyers were told by their bank that it would not extend financing to enable them to complete the purchase. Their lawyer attempted to address the financing issue.

On December 15, 2021 (the day the APS was scheduled to close), at approximately 3:30 p.m., the buyers’ lawyer called the sellers’ lawyer to advise that the buyers’ financing had fallen through, and that they were requesting a “short extension” of the closing date. No further explanation was provided.

The sellers’ lawyer replied that the buyers’ lawyer should put her request for an extension in writing and he would seek instructions from his clients.

Approximately an hour and a half later, at 5:08 p.m., the sellers’ counsel sent another copy of the closing documents. Those documents included the statement of adjustments, trust account information, confirmation that the transfer had been sent to be signed by the buyers’ lawyer, the sellers’ closing certificate, the sellers’ counsel’s undertaking and correspondence regarding the lockbox information, and the TD mortgage discharge statement.

At 5:09 p.m., the sellers’ lawyer sent an email to the buyers’ lawyer confirming that his clients were ready, willing and able to close that day as scheduled:

• I write to you further to the closing of the above referenced matter, which is scheduled to be completed Today.
• I confirm that the time is now approximately 5:05 pm and we have not received any funds or closing documents from your office. I also confirm that you have not completed the Transfer that was messaged to your office, as such we cannot sign for completion with respect to the same.
• I also confirm that we have provided your office with all deliverables pursuant to the DRA. Our clients are ready, willing, and able to complete this transaction today.
• Please immediately advise as to the status of this matter and when we can expect to receive the funds and signed documents in order to complete this transaction as scheduled. [Bolded emphasis in original; underscore emphasis added.]

At 5:12 p.m., 47 minutes before the closing deadline, the buyers’ lawyer finally sent a written request for an extension of the closing until January 10, 2022.

At 5:16 p.m., the sellers’ counsel emailed the buyers’ lawyer to advise that he would be in touch as soon as he had instructions.

At 6:33 p.m., after the stipulated closing deadline, the sellers’ lawyer sent an email to advise that the sellers were “treating [the] request for an extension as an anticipatory breach of the Agreement of Purchase and Sale thereby discharging [the sellers] of the obligation to tender”. He also confirmed that it was past 6:00 p.m. and that the buyers had failed to provide the closing funds and documents necessary to complete the transaction. His clients refused to extend the closing. Therefore, the deposit was forfeited, and the APS was terminated.

At 6:35 p.m., the buyers’ lawyer asked for a further extension to January 20, 2022. That too was refused.

The next day the buyers’ counsel wrote advising that her clients had obtained private financing and were now able to close.

No evidence of the buyers’ financing was ever provided to the sellers.

Here’s what subsequently happened:

On December 22, 2021, the sellers entered into another agreement of purchase and sale with third parties for $1,235,000. This was $130,000 more than the buyers had agreed to pay for the property.

Alright, so now what?

The buyers saw that the property sold for $130,000 more than they had contracted to pay, and now they wanted their $50,000 deposit back.

The buyers made an application in which they “sought specific performance or in the alternative, damages, or relief from forfeiture.”

“Relief from forfeiture” means undoing their forfeited deposit.  It’s a legal way of saying, “Force them to give us our confiscated deposit back.”

But the “damages” is interesting, since the buyers were trying to argue that they were somehow still entitled to purchase the house after they breached and refused or were unable to complete the transaction on the scheduled closing date.

Wow, the balls on them!

This application was denied.

The ruling made several important points:

• When the buyers’ lawyer told the sellers’ lawyer that the buyers’ financing had fallen through, there was an anticipatory breach.
• Prior to the agreed closing deadline of 6:00 p.m. on December 15th, the sellers affirmed the contract by pressing for performance.
• The sellers’ lawyer had confirmed with the buyers’ lawyer before the closing deadline that he had provided her with all deliverables and that his clients were ready, willing and able to close.
• The buyers were not ready to close by the closing deadline, given that their financing fell through.
• Thereafter, counsel for the sellers communicated his clients’ intention to terminate the APS, which they were entitled to do.
• The sellers did not act in bad faith.
• It was not unconscionable to allow the sellers to retain the deposit after selling the property to third parties at a higher price, and so relief from forfeiture was refused.

And that was that!

Until, it seems, it wasn’t!

The buyers appealed this decision, but not just for their $50,000 deposit, but rather the buyers claimed damages in the amount of $130,000 (ie. the amount the sellers received from the sale of the property to third parties over and above the amount the buyers agreed to pay).

As noted in their appeal: “In the alternative, they claim relief from forfeiture on the basis that it would be unconscionable to allow the sellers to retain their deposit.”

This is incredible.

They’re claiming the $130,000 difference between what the seller sold for the first time around, versus the second, and then in the alternative, they would claim their $50,000 back.

It must be a legal strategy since it makes zero sense to us laymen.

The appeal argued:

The application judge erred in (1) concluding that the sellers were entitled to terminate the APS and (2) in refusing to grant relief from forfeiture.

The appeal decision is lengthy.

But here are a few important parts in which the appeals judge rejects the buyers’ appeal and reaffirms the application judge’s decision…

In my view, the application judge did not err in refusing to grant relief from forfeiture.

He rightly acknowledged that the forfeited deposit was out of proportion to the damages suffered. The evidence was that the sellers were able to sell the property for approximately $130,000 more than the buyers had agreed to pay within approximately two weeks of the failed closing. However, that did not mean that it would be unconscionable for the sellers to retain the deposit.

In assessing unconscionability, the application judge considered the proportionality of the deposit to the overall purchase price, noting that the deposit amount was only 5% of the purchase price, which was a standard sum for residential real estate purchases.

Geez, I would hate for the government to make a habit of deciding what is “conscionable” and what is “unconscionable,” but I digress.

Here is what I believe could be the largest takeaway and has the furthest-reaching implications for our market:

The fact that the property was resold at a higher price also did not justify relief from forfeiture. The application judge noted that if purchasers were allowed to reclaim their deposits in a rising real estate market simply because vendors resold their property at a higher price it would eviscerate the very purpose of deposits.

Very, very interesting.

It almost seems as though the decision, or at least the appeals decision, is based on a “what if” scenario for the future.

What if we grant relief from forfeiture, ie. give the original buyers their deposit back, and thereby send a message to the market that it’s okay to walk away from firm real estate transactions?

Surely this wasn’t ‘the’ reason for the decision, but it was, at the very least, a consideration.

I believe that this is a landmark ruling in the Province of Ontario and that it will have a huge effect on the market from here on out.

Or at least, it should.

I don’t know how many real estate agents are reading court cases like this one, let alone buyers and sellers.

There aren’t a lot of instances of buyers walking away from deals before closing, but they do happen from time to time, especially in a declining market.

We saw a lot of the 2017-era cases decided in 2021 and 2022, and that dealt with buyers who were sued by the sellers after a house re-sold for less.

But a house re-selling for more, like the case described above?  That’s really rare.

And until now, I’m sure buyers in this situation would think, “I have nothing to lose.  The seller re-sold for more, they can’t keep my deposit.”

Now, they can.

And they will, moving forward.

And what’s more is that they should

Otherwise, what’s the point of the deposit to begin with?