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So, You Purchased a House Before the COVID-19 Crash?

May 04, 2020

By Samantha Bogoroch, Litigation Group

Image: Samantha Bogoroch, Litigation LawyerYou bought your dream home. Then the world shut down and the market collapsed. Do you still have to close the deal?

Generally speaking, if a purchaser signs an Agreement of Purchase of Sale but does not close for whatever reason, the seller can sue the purchaser. So long as the seller can prove that he or she was ready, willing, and able to close, which means that the seller’s lawyer had all the paperwork ready to close the deal, then the seller can put their existing home back on the market and sue the buyer for the difference between the original purchase price and the amount the house ended up selling for. In addition, if the deal does not close because the purchaser backs out of the deal, then the seller keeps the deposit, regardless of whether the seller sues the purchaser for damages. When the seller sues the purchaser for the difference in purchase prices, the deposit is then deducted from the total loss.

So, how can a buyer get out of a deal?

While contracting parties may look to rely on the doctrine of force majeure, standard OREA residential agreements of purchase and sale in Ontario do not include force majeure clauses. Force majeure is a contractually agreed-upon provision that allows a party to delay its obligations as a result of unforeseen circumstances, such as a pandemic or Act of God. It is possible that a force majeure provision may have been added to an Agreement of Purchase and Sale as an additional clause, but even in these circumstances, it would likely only delay the closing, not avoid the agreement altogether.

This leaves purchasers with the equitable doctrine of frustration, which they may try and argue. If the doctrine of frustration is invoked, then the contract is canceled as it can no longer be performed as a result of an unforeseen circumstance. Frustration applies where, without the fault of any party, an unforeseen event makes the contract radically different from what the parties originally agreed to. Thus, the party relying on frustration may be relieved of his or her contractual obligations.

It is impossible to predict whether the courts will make special allowances for purchasers as a result of COVID-19 or whether purchasers will be able to rely on frustration. However, whether you are a purchaser or a seller, you should be aware of how the courts have previously dealt with frustration in times of economic distress and previous housing market crashes.

Perkins v. Sheikhtavi, 2019 ONCA 925:

In April 2017, a purchaser made an unconditional offer to purchase a home. The sellers accepted this offer and closing was scheduled to take place on July 10, 2017. After the offer was accepted, but before closing, the Ontario government announced the Non-Resident Speculation Tax, which imposed a 15% tax on non-resident purchasers. As a result, real estate prices allegedly dropped by 20 to 30 percent.

On the day of closing, the purchaser advised the sellers that she could not close as she had been unable to sell her own home and could not obtain mortgage financing. As the deal did not close, the seller put the property back on the market but sold it for over $600,000 less than the purchaser had agreed to pay. The seller then sued the purchaser seeking $619,112, being the difference between the amount the purchaser offered and the amount the house sold for. The purchaser relied on the doctrine of frustration and argued that the provincial government’s announcement frustrated the agreement. She also sought the return of her deposit.

The judge found in favor of the seller and held that the doctrine of frustration could not be applied. Although the government’s announcement was a supervening event, the judge did not find that there was a radical change in obligation to force the purchaser to do something radically different from what the parties had agreed upon. Further, the judge said that any term to relieve the purchaser from her obligation concerning financing could have been resolved by including a term concerning financing in the Agreement of Purchase and Sale. However, the purchaser knowingly did not include a term for financing. The judge concluded that the purchaser got what she wanted – the property at the price she was offering to pay. She did this at her own risk. Accordingly, she was ordered to pay the $619,112 plus additional carrying costs in the amount of $4,621.05. The purchaser appealed.

The Ontario Court of Appeal agreed with the judge’s decision. A contract is not frustrated if the supervening event was contemplated by the parties at the time of the contract and the parties deliberately chose not to include it in the contract. The purchaser, in this case, deliberately chose not to include a condition that she had to be able to sell her house or obtain financing before closing as a term of her offer to purchase. The Court held that, even if there was a 20%-30% decrease in house prices and the government announcement was a supervening event, there was no radical change in the contract. Accordingly, the appeal was dismissed.

Bang v. Sebastian, 2019 ONCA 501

In May 2017, a woman bought a house and paid a $35,000 deposit at the time of signing the Agreement of Purchase and Sale. She agreed to pay a further deposit of $10,000 the following week. She did so and the house was scheduled to close on August 7, 2017. It was further agreed that on closing, she was to pay the balance of the purchase price, which was $995,000. Instead, the purchaser and her husband bought a nearby house at a lower price and closed that property on July 28, 2017. She then advised the sellers that she was not able to complete the sale because she could not obtain financing.

The sellers had already purchased another home and were relying on the funds from the sale of their current home to pay for their new home. They re-listed their house for sale but could not sell it for seven months. Once they finally sold the house, they sold it for less than the purchaser had agreed to pay. They sued the purchaser.

The purchaser argued that she ought to be relieved from any obligations under the Agreement of Purchase and Sale because the contract was frustrated by a supervening event: a fall in real estate prices in the area, which made her unable to obtain adequate financing. The Court found in the sellers’ favor.

The Court said that even if there was a decline in the market and that the purchaser was able to establish a fall in real estate values, this would not have constituted an unforeseen supervening event of the nature required to invoke the doctrine of frustration. The Court said that any fall in real estate values does not radically alter a purchaser’s obligations under an Agreement of Purchase and Sale. Here, the purchaser contracted to pay $995,000 regardless of whether or not she could obtain financing.

The purchaser was ordered to pay the sellers’ damages in the amount of $87,221.33, which represented their losses minus the deposit. The purchaser appealed the decision to the Ontario Court of Appeal. The Court of Appeal agreed with the lower Court and dismissed the purchaser’s appeal.

Takeaways

Although COVID-19 is a unique and unprecedented situation, the determination of whether a party may be able to rely on the doctrine of frustration is highly fact-specific. Frustration will depend on the impact of COVID-19 on the contract. As outlined in the cases above, the courts have recently held that a decline in the real estate market does not frustrate a contract. However, the current situation is uniquely different. In previous recessions and economic downturns, borders were not closed, businesses were not legislatively mandated to shut down, and millions of people were not in quarantine and self-isolation. Moreover, we still do not know how long the pandemic will last.

If you have purchased a property and believe that the COVID-19 situation has frustrated your obligations to close, or if you are a seller and the purchasers have backed out of the deal, please call or email any lawyer in the Minden Gross LLP Litigation Group so that we can determine what your rights and remedies are and whether or not you have a case.

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