What Happens If a Buyer Fails to Close On a Real Estate Sale?
Generally, A Buyer In a Real Estate Deal Must Close or Risk Litigation. In Litigation, If the Seller Proves Breach By the Buyer, the Seller Is Likely Entitled to Damages Involving Carrying Costs, Decrease In Price In a Subsequent Sale, and Forfeiture of Deposit. The Seller Must Make Reasonable Efforts to Minimize Losses.
Similar Questions About Breach of a Real Estate Sale Include:
- What Happens If a House Sale Falls Through?
- What Happens When a Real Estate Sale Falls Through?
- What Happens When the Buyer Walks Away From a Real Estate Deal?
- Can a Buyer Be Sued For Failing to Complete a House Sale?
- Can I Sue If the Buyer of My House Walked Away From the Deal?
Various Legal Issues Involving Failure to Close a Real Estate Sale
For various reasons, including a sudden market downswing that follows a strong market upswing, many buyers are unable to fulfill the contractual obligations within an Agreement of Purchase and Sale (APS). Simply stated, buyers may abort, or be unable, or unwilling, to properly complete a realty deal in accordance to previously agreed terms. When the buyer fails to complete a sale, the seller may incur various losses and may bring legal action against the breaching buyer. The losses may involve the difference between the sale price agreed upon within the sales agreement within the breaching buyer and a subsequent price with a subsequent buyer as well as the expense of various carrying costs the seller incurs during the period of time following the breached sales agreement and the time until the seller can sell to a new buyer.
Is a Sudden Change In the Real Estate Market A Legal Excuse to Walk Away From a Deal?
A Sudden Change In the Market Is Insufficient Reason For a Buyer to Walk Away.
Whereas a buyer that aborts or otherwise fails to close a realty sale may defend the breach on the basis that the contract (APS) was legally frustrated by a force majeure, being a sudden and unexpected change in market conditions, the courts have stated that such is generally viewed as a potential occurrence and is therefore a foreseeable possibility rather than a force majeure event. Specifically, it was stated in Forest Hill Homes v. Ou, 2019 ONSC 4332 that a frustration would require an unforeseeable event that would render the contractual obligations impossible to fulfill, being something more than a market change, whereas it was said:
 Defendants’ counsel submits that the Defendants’ performance of their obligations under the APS was made impossible by a drastic and unforeseeable drop in the real estate market which made it impossible for them to obtain the financing they needed. I note that the onus is on the party claiming frustration of a contract: Bang v Sebastian, 2018 ONSC 6226 (CanLII), at paras 27, 30. Despite this, the Defendants have not obtained any appraisal of the Property, nor have they submitted any other real estate market evidence. They simply say they could not get financing, and they subjectively attribute this to a change in the market.
 Even if there were evidence to support the Defendants’ assertion, there is nothing about a change in the market that amounts to an unforeseen event that substantially changes the agreement. This was confirmed in Paradise Homes North West Inc. v. Sidhu, 2019 ONSC 1600 (CanLII), at para 11, where the court reasoned that a change in the market is not the kind of radical change that transforms the nature of the contract:
In this case, the defendant defaulted because he was not able to borrow the amount of money he required to close the deal…. While he states that he was unable to borrow the money because the market prices fell and that this was unforeseen and such a radical change that it completely changed the nature of the APS. I do not find that to be the case. The contract was not rendered totally different from what the parties had intended. The parties had intended that 10 Truro Circle would be sold by the plaintiff to the defendant for the agreed-upon amount of $819,990. The contract did not change and was not altered.
 There is nothing in the record to support the Defendants’ assertion that something has occurred that frustrated the contract and made it impossible to perform as agreed.
Damages by Failure of Closure
As above, when the buyer fails to complete a realty deal, the seller may incur a loss between the selling price established with the breaching buyer and the selling price established with a subsequent buyer. The difference between these two sums becomes a compensable loss suffered by the seller; Forest Hill Homes:
 The authorities on damages state that damages “for breach of contract should place the plaintiff in the monetary position that it would have been in had the purchaser not breached the Agreement of Purchase and Sale.”: Bang v Sebastian, 2018 ONSC 6226 (CanLII), at para 39-40. The loss of the bargain, or loss of the value of the sale (contract price minus market value of the land), is therefore the largest portion of the damages calculation: 100 Main Street East Ltd. v WB Sullivan Construction, 1978 CanLII 1630 (ON CA), 1978 Carswell Ont 1459, at para 55 (Ont CA). This refers to the market value as of the closing date, DHMK Properties Inc. v 2296608 Ontario Inc., 2017 ONCA 961 (CanLII), at para 15, which must be established by appraisal: River Oaks Convenience Plaza Inc. v Al-Qauasmi, 2009 Carswell Ont 1153 (SCJ) at para 6.
Seller Duties, required to mitigate
As is trite, being very common to the law, a duty to mitigate exists whereas a seller must take effort to minimize losses and the failure of reasonable efforts to minimize loss arise due to the conduct of the non-breaching party rather than the breaching party as such was stated in Southcott Estates Inc. v. Toronto Catholic District School Board,  2 SCR 675:
 This Court in Asamera Oil Corp. v. Seal Oil & General Corp., 1978 CanLII 16 (SCC),  1 S.C.R. 633, cited (at pp. 660-61) with approval the statement of Viscount Haldane L.C. in British Westinghouse Electric and Manufacturing Co. v. Underground Electric Railways Company of London, Ltd.,  A.C. 673, at p. 689:
The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach; but this first principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps.
 In British Columbia v. Canadian Forest Products Ltd., 2004 SCC 38 (CanLII),  2 S.C.R. 74, at para. 176, this Court explained that “[l]osses that could reasonably have been avoided are, in effect, caused by the plaintiff’s inaction, rather than the defendant’s wrong.” As a general rule, a plaintiff will not be able to recover for those losses which he could have avoided by taking reasonable steps. Where it is alleged that the plaintiff has failed to mitigate, the burden of proof is on the defendant, who needs to prove both that the plaintiff has failed to make reasonable efforts to mitigate and that mitigation was possible (Red Deer College v. Michaels, 1975 CanLII 15 (SCC),  2 S.C.R. 324; Asamera; Evans v. Teamsters Local Union No. 31, 2008 SCC 20 (CanLII),  1 S.C.R. 661, at para. 30).
 On the other hand, a plaintiff who does take reasonable steps to mitigate loss may recover, as damages, the costs and expenses incurred in taking those reasonable steps, provided that the costs and expenses are reasonable and were truly incurred in mitigation of damages (see P. Bates, “Mitigation of Damages: A Matter of Commercial Common Sense” (1992), 13 Advocates’ Q. 273). The valuation of damages is therefore a balancing process: as the Federal Court of Appeal stated in Redpath Industries Ltd. v. Cisco (The), 1993 CanLII 3025 (FCA),  2 F.C. 279, at p. 302: “The Court must make sure that the victim is compensated for his loss; but it must at the same time make sure that the wrongdoer is not abused.” Mitigation is a doctrine based on fairness and common sense, which seeks to do justice between the parties in the particular circumstances of the case.
Whereas the duty to mitigate is upon the seller, the onus to prove a failure to mitigate is upon the buyer. This which was stated in Degner v. Cabral, 2019 ONSC 1610 at paragraph 54. Furthermore, it was also said in Degner at paragraph 56 that the efforts to mitigate must be performed reasonably rather than perfectly by taking steps that are reasonable to minimize loss rather than needing to take all possible steps to minimize loss. Specifically, the Court said:
 In the decision of 642947 Ontario Ltd. v. Fleischer (2001), 2001 CanLII 8623 (ON CA), 209 D.L.R. (4th) 182 (Ont. C.A.), the court found that as a general rule in a falling market the court should award the vendor damages equal to the difference between the contract price and the highest price obtainable within a reasonable time after the contractual date for completion following the making of reasonable efforts to sell the property commencing on that date.
 The innocent party need only act reasonably and not perfectly or flawlessly in his efforts to mitigate; he need not take all possible steps to reduce his loss. O’Hare v. Wyton, 2018 ONSC 3946 (CanLII); Janiak v. Ippolito, 1985 CanLII 62 (SCC),  1 S.C.R. 146. That principle was recently followed in the Ontario Court of Appeal decision of Saramia Crescent General Partner Inc. v. Delco Wire and Cable Limited, 2018 ONCA 519 (CanLII) where the Court @ para 80 confirmed that the duty to mitigate only requires the plaintiff to take reasonable steps, not any and all steps.
Accordingly, the seller of a property who suffers harm when a sale fails to close must take reasonable steps to minimize that harm; however, those steps may be imperfect. Furthermore, the burden of proof to demonstrate that the seller failed to take reasonable steps to minimize the loss and that those reasonable steps were available is on the buyer. More easily said, the buyer must prove that there was a failure to mitigate, being a failure to reduce the harm, or some of the harm, by the seller.
Forfeit of Deposit
When a realty deal fails to close, as above, the seller often incurs hardship such as the unexpected carrying costs, the need to re-list the property, the possible need to re-stage the property, and the potential need to lower the price, especially where an economic downturn occurred since the original deal was entered into.
Generally, a term of a real estate deal involves a deposit. When the real estate sale fails to close due to a breach by the buyer, the issue often arises as to whether the seller may rightfully retain the deposit as a 'forfeiture'. In the case of Azzarello v. Shawqi, 2018 ONSC 5414, it was said:
 In De Palma v. Runnymede Iron & Steel Co., 1949 CanLII 73 (ON CA),  O.R. 1 (C.A.), at p. 8, the Court of Appeal held that where the sale of land does not close due to a default by the purchaser, the vendor is entitled to the deposit without having to prove actual damages. The purpose of the forfeiture of a deposit is compensation to the disappointed vendor “for the fact that his property was taken off the market for a time as well as for his loss of bargaining power resulting from the revelation of an amount that he would be prepared to accept”: Baker v. Wynter (2006), 49 R.P.R. (4th) 134 (Ont. S.C.), at para. 35, citing Leading Investments Ltd. v. New Forest Investments Ltd.,  S.C.R. 70 (S.C.C.), at pp. 86-87.
 The court must decide whether the parties intended an advance payment to be partial payment or a deposit to be forfeited in the event of non-completion of the transaction: Mikhalenia, at para. 32. The use of the word “deposit” has been interpreted as indicating that the payment was intended to be forfeited in the event of a breach: Mikhalenia, at paras. 32, 35; Iyer v. Pleasant Developments Inc. (2006), 2006 CanLII 10223 (ON SCDC), 210 O.A.C. 90 (Div. Ct.), at para. 8.
 As was the case in Mikhalenia, the Agreement is silent on the forfeiture of the deposit in the event of the purchaser’s default. This silence was found to weigh in favour of an interpretation that the deposits are to be forfeited: Mikhalenia, at para. 38. Similarly, in River Oaks Convenience Plaza Inc. v. Al-Qauasmi (2009), 2009 CarswellOnt 91 (S.C.), at paras. 17-18, Daley J. found that the deposits “were paid to secure the performance of the agreement of purchase and sale and as a result of the default by the respondents in completing the transaction, the applicant is entitled to have those funds paid over to it from the trust account where they presently sit.”
There is a possibility, perhaps remote, that the buyer may find relief from forfeiture of the deposit if it is demonstrated that the forfeiture of the deposit would be unconscionable. Generally, to obtain relief from forfeiture it must be demonstrated that the forfeiture of the deposit is grossly disproportionate to the harm or reasonable expectations. Specifically, per Azzarello, it is said:
 Relief from forfeiture is an equitable remedy: Redstone Enterprises v. Simple Technology, 2017 ONCA 282, 137 O.R. (3d) 374, at para. 20. A court should consider the factors enunciated in Redstone, at para. 15, when determining whether to grant relief from forfeiture:
(i) Whether the forfeited deposit was out of all proportion to the damages suffered; and
(ii) Whether it would be unconscionable for the seller to retain the deposit.
 The Court of Appeal in Redstone noted that unconscionability is an exceptional finding (at para. 25). Relief from forfeiture is not warranted in the circumstances of this case because the deposit was not out of all proportion to the damages suffered and it would not be unconscionable for the Plaintiffs to receive it.
 First, while it is possible to establish unconscionability because the forfeited amount is disproportionate to the damages suffered, there is no disproportionality in this case: Redstone, at para. 26. Upon a breach of an agreement of purchase and sale, a vendor’s failure to establish damages does not necessarily render forfeiture of the deposit unconscionable: Redstone, at paras. 17, 38. Courts have allowed parties to retain transaction deposits even when they may not have suffered any damage from failure to close: Hatami v. 1237144 Ontario Inc., 2018 ONSC 668, 2018 CarswellOnt 1740, at para. 57.
 In this case, the Plaintiffs have demonstrated that they did suffer damages due to the Defendant’s breach. I see no disproportionality between the deposit and the damages suffered that would warrant relief from forfeiture.
 Second, the deposit amount is not disproportionate to the purchase price. Courts have found that deposits in the amount of 4.8 percent, 20 percent, and 25 percent of sale price were not unconscionable: Signal Chemicals Ltd. v. Dew Man Marine Trade Inc., 2011 ONSC 3951, 8 R.P.R. (5th) 151, at para. 16 (citations omitted). The percentage is not determinative, but is merely a factor. In Redstone, the deposit was approximately 7 percent of the purchase price and was found not to be commercially unreasonable. In Mikhalenia, at para. 46, the deposit was $100,000.00 on a total sale price of $1,300,000.00 (6.67 percent) and was found not to be unconscionable. In this case, the $75,000.00 deposit was approximately 4.8 percent of the $1,555,000.00 purchase price. This factor suggests that forfeiture is not disproportionate or unconscionable.
 Where there is no gross disproportionality in the size of the deposit, the court must consider other indicia of unconscionability: Redstone, at para. 29. In Redstone, the Court of Appeal identified “inequality of bargaining power, a substantially unfair bargain, the relative sophistication of the parties, the existence of bona fide negotiations, the nature of the relationship between the parties, the gravity of the breach, and the conduct of the parties” as useful factors to assess unconscionability emerging from the case law (at para. 30). The unconscionability indicia are context-specific and non-exhaustive: Redstone, at para. 30. The facts of this case do not suggest the existence of any of the unconscionability indicia, or any potentially new unconscionability factors. The Plaintiffs acted in good faith to attempt to close the transaction. In the circumstances, it would not be unconscionable for the Plaintiffs to receive the deposit.
A buyer in a realty transaction is required to complete the deal by properly closing in accordance to the agreement and is without an opportunity to abandon the deal when faced with a dramatic change in market value between the time the deal was agreed to and the closing date. If the buyer fails to close, the seller may bring legal action for the difference in price between the agreed price and the price within a subsequent transaction. It is notable that a duty to mitigate exists and the seller must make reasonable efforts by acting with reasonable diligence to pursue a subsequent transaction and the selling price within the subsequent transaction must be reasonable. Should the breaching buyer seek to argue that the seller failed to adequately mitigate, the breaching buyer must demonstrate that seller failed to act reasonable whereas the seller is without a duty to act perfectly in the mitigation efforts. Furthermore, unless the buyer is able to demonstrate that the forfeiture of a deposit, if any, would be unconscionable, meaning grossly disproportionate, the seller may keep the deposit when the buyer fails to close.