Closing real estate transactions can be a stressful and lengthy process.
With a record-breaking one million jobs lost across Canada in March, these are not the best of times and buyers and sellers may be wondering if it is possible for them to terminate their real estate transaction after the Agreement of Purchase and Sale (“APS”) has been executed. Whether you have already signed an APS or are contemplating putting in an offer but want to protect yourself should you need to terminate the transaction, the following information will assist you in avoiding liability.
Buyers faced with changing financial situations may feel the current health crisis justifies terminating their Agreement of Purchase and Sale prior to closing. While the principle of force majeure may assist some buyers seeking to pull out of their obligations under an APS, this contractual tool will not be available to many buyers (and in some cases, sellers). Understanding the application of force majeure clauses will assist both buyers and sellers in understanding the risks of breaching an APS in today’s climate.
Force majeure clauses could relieve a buyer in the event they fail to meet their contractual obligations because of extenuating circumstances. Determining what would or would not qualify as an extenuating circumstance, or as an “act of God”, depends on the language of the provision in the contract. The mere fact of contractual obligations becoming more difficult or more expensive is often insufficient to allow a party to rely on such a clause. For instance, say there is a firm APS, the buyer loses their job prior to closing and the buyer’s mortgage lender pulls funding, the buyer will likely not have any recourse under the APS to get out of the contract.
Most buyers will be unable to rely on a force majeure clause to back out of an APS. This is because most real estate agents (and lawyers) practicing in Ontario use the Ontario Real Estate Association’s (“OREA”) standard form of APS, which do not include standard force majeure clauses. If a buyer wants the protection of a force majeure clause, they should ensure that the person drafting their OREA form includes it in the Schedule “A”.
The inclusion of a force majeure clause does not, however, ensure that a buyer’s reliance on it will be successful. The buyer must demonstrate that COVID-19 satisfies the language in the APS’ clause. Buyers may have to demonstrate that performance was impossible, that COVID-19 and its consequences could not have been foreseen at the time the parties entered the contract, and that there were no steps the buyer could have taken to prevent or minimize consequences. Whether a buyer is successful in terminating the APS will therefore depend on the language of the clause and on the facts of their case.
The common law doctrine of frustration may be available where an APS does not include a force majeure clause, but the buyer is nevertheless hoping to retract their agreement to purchase. Frustration occurs when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes “a thing radically different from that which was undertaken by the contract”. Like with force majeure, the fact that an obligation has become more onerous or more expensive does not constitute frustration. In one 2017 case, for example, a new tax was introduced between the signing of the APS and the closing date which resulted in an increase in transfer tax from $58,040 to $458,240. The buyer’s argument that the increase frustrated the contract was rejected. In another 2019 case, a new tax affected the buyer’s ability to sell her own property and thus obtain the necessary funds for the purchase. The buyer’s argument that the contract was frustrated by her inability to obtain financing was similarly rejected.
Force majeure and frustration of contract are not “get out of jail free” cards for terminating an APS, and buyers could owe significant sums to the selling party if they are found in breach. For instance, the seller might be entitled to keep the deposit and sue the buyer for the loss in value of the property upon resale. This can be a costly mistake – the defaulting buyer in the 2019 case above, for example, was ordered to pay the seller over $620,000. The same holds true for a seller who is looking to back out of the transaction.
While parties should always take care in drafting their APS, these uncertain times warrant increased consideration on how best to protect a party’s interests. Additions to the Schedule “A” of the OREA forms that protect parties from unforeseen circumstances could be helpful, as could making the purchase conditional on financing, including bridge financing. Terms establishing safeguards for unforeseen delays or complications should be carefully examined. Where the APS is drafted such that the closing date shall be delayed in the event that either the banks or the land registry offices are closed, it is important to set clear timelines as to when the new closing date shall be. If the closing is “x” business days after the bank and/or land registry offices open, then enough time should be provided to allow both the banks and the lawyers to prepare the file to close. Conversely, if such terms establish lengthy periods before an APS is deemed terminated, the seller will be unable to put their property back on the market. Caution should also be taken if the APS states that should the closing not occur within “x” days, due to the closure of the banks and/or land registry offices, then the deal may be terminated. The APS should make it clear which parties have ability to exercise this right and what triggering events allow the party to exercise such right. Finally, in the event that a buyer feels unable to carry out their obligations, negotiating with the seller to determine a compromise is often a more prudent option then breaching the APS.
The assistance of a real estate lawyer can help protect your interests in a real estate transaction; now more than ever.
Nelligan Law gratefully acknowledges the contribution of Adrienne Fanjoy, Student-at-law, in writing this blog post.