With the real estate market showing unpredictable trends, it has become unclear for a Buyer and a Seller what to expect. “What, where, when” are daunting questions for a potential Buyer or Seller. “What is the right price?”, “Where should I buy?”, “When should I sell?”, etc., are some common questions that are difficult to answer in this transitioning market. Answers to these questions take multiple turns from the date of acceptance to the date of closing.

A Seller who bought during a very different kind of market that was prevalent the past few years, may expect to negotiate as Seller in a market of multi-bid-wars. A Buyer may feel the infamous “Buyer’s remorse”, believing that they should have waited more, or feeling that rising inflation can make it difficult for them to afford mortgage payments. These uncertainties cause one to think, “Am I doing the right thing?”, and can ultimately lead to the decision of backing out.

This brings us to the question: What happens when you back out of a real estate transaction?

Before the Agreement is “firm”

In order for an offer to be accepted, Buyer and Seller formally enter into an Agreement of Purchase and Sale (APS). Conditions such as home inspection, opportunity to arrange financing for the Buyer, status certificate review (for condominium properties), etc., might be included in the APS. A condition will usually contain a period within which that condition must be waived or fulfilled. Before such period is complete OR before the parties waive all such conditions, the APS is considered to be “not firm”. During this period, the party for whose benefit the condition is included may have a right to back out by relying on such condition. For example, if there is a condition for Buyer’s lawyer to review the status certificate, and it is noted by the Buyer’s lawyer that common expenses are going to increase, the Buyer may be able to rely on such condition to back out without breaching the APS.

After the Agreement is “firm”

Once all deadlines to back out due to conditions stipulated in the APS have passed OR once all the conditions have been waived, the APS is considered to be “firm”. All gates to back out of the APS close, and no party has the right to terminate the APS, unless there was a misrepresentation by either party. An example of misrepresentation is a Seller’s failure to disclose a material defect in the property which was known to them. Backing out without relying on a condition or after an APS is firm can lead to a series of implications. One breach leading to the other. For an illustration, assume a Seller is planning to use their sale proceeds to purchase a new property. A Buyer backing out of such transaction means the Seller not being able to close their purchase. And what if there is a subsequent transaction in the chain? The Buyer not only risks their deposit but also exposes themself to damages that might arise in all the transactions down the chain. Damages include loss of opportunity, difference in the sale price when property is later sold, mortgage interest, home insurance premium, etc. Not to forget, the deposit paid by the Buyer can be forfeited to

the Seller. In case of the Seller defaulting, the Buyer can claim similar damages. For example, a Buyer who has sold their house and was planning to move in after the purchase, can claim rent and cost of storage from the Seller. The list of possible damages can be a long one.

Entering into a real estate transaction is a huge commitment. The amount of money involved is significant, and there are many different stakeholders apart from just the Buyer and the Seller. It is vital that you consult a real estate lawyer before making any decision with regards to your transaction.

If you have any legal questions please do not hesitate to contact us to speak with one of our lawyers at (905) 270-6660 or e-mail us at:  Info@kormans.ca.

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