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Deposits & Damages on Transactions That Do Not Close

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As a law firm that specializes in completing real estate transactions we are often asked to advise on the rights of parties if the transaction is not completed. In particular, what will happen to the Deposit, and what remedies can a defaulting party be sued for?

The simple answer is that it depends on the terms of the Agreement of Purchase and Sale (APS) and the particular facts of each transaction. However, the rights and available remedies of the parties are governed by established legal principles and case law. For example, the remedy of Specific Performance of an APS is available but will only be awarded by a Court in very exceptional circumstances where the non-defaulting party could not adequately be compensated in damages.

Consideration must be given to determine whether a party has in fact breached the APS or whether the facts establish that there has been an Anticipatory Breach of the APS that will give rise to certain remedies, including the termination of the APS. If a transaction is terminated due to the breach of the APS by a Buyer, the Deposit (which is generally considered non-refundable unless the Seller has defaulted) is usually forfeited to the Seller as liquidated damages and not as penalty. However, the Seller will also usually want to reserve the Seller’s right to hold the Buyer liable for any losses, damages, costs and expenses, incurred by the Seller as result of the Buyer’s breach.

The amount of potential damages that are not known at the time of the breach could include the difference in the selling price to a subsequent Buyer, carrying costs (utilities, insurance, property taxes), legal fees, and real estate commissions.

A non-defaulting Seller has a duty to mitigate the Seller’s damages by taking steps to re-sell at fair market value in a reasonable time period. There could be an offset of the Deposit against a claim for damages.

The parties have to be careful in drafting any documents for the release of the Deposit by its holder (usually the Seller’s real estate brokerage). Considerations include whether the release is mutual, final, and whether it releases the agents on the transaction as well.

Given all of the foregoing, would it be advisable to default a Buyer or would it be preferable to negotiate an extension to try to get the APS transaction completed?  Litigation costs and the up-front cost of providing a litigation lawyer with a retainer have to be considered, together with an understanding of the litigation process and its timing.

Our law firm’s focus is always on getting the transaction completed on time as that is the way to best serve our clients. This is accomplished through our experience and understanding of the rights of the parties if the transaction is not completed and the advice that we are then able to give to our clients and their agents. Fortunately, an extremely high percentage of the transactions that we act on get completed, and get completed on the scheduled completion dates without extensions, even during the COVID Pandemic. 

 

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David H. Korman is a Partner at Kormans LLP. His practice areas include residential and commercial real estate transactions, commercial leasing and private and institutional lending. You can reach David at dkorman@kormans.ca.

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