Cases arising from failed residential real estate transactions in a falling market reaffirm that buyers who breach purchase agreements may face significant financial repercussions.
Often, buyers argue that sellers have failed to mitigate losses by not re-listing the property or securing another buyer at the same price. However, this argument, as seen in Singh and Kaur v. Feneich, must be backed by evidence and cannot be based on speculation.
In this case, the plaintiff sellers agreed to sell their property for $1.25-million with a closing date in early August 2022. Despite several extensions, the defendant buyer was unable to secure financing and the transaction failed to close.
The sellers re-listed the property in 2022 and accepted a significantly lower offer of $965,000. They sued for damages and brought a motion for summary judgment based on the well-established principles for motions in similar cases.
Mitigation efforts and legal obligations
The defendant conceded to breaching the Agreement of Purchase and Sale (APS) and acknowledged liability for damages but disputed the sellers’ calculations for the damages sought.
The defendant challenged both the sellers’ conduct in failing to consider another offer to purchase made by the defendant after the breach of the APS in August 2022, and the date to be used for calculation of the damages. In that regard, the defendant’s evidence was that she had made a further offer to purchase in January 2023, with a proposed closing date of February 2023 that ought to be used for the calculation of damages.
The court noted that sellers are required to take reasonable—not exhaustive—steps to mitigate losses.
The sellers presented evidence that they relied on professional advice from their real estate broker and accepted a reasonable offer given the market conditions. They also faced the unexpected burden and challenge of carrying two properties and accepted a reasonable offer.
The defendant did not file any independent, objective evidence in support of her position that the sellers failed to mitigate their damages in the form of evidence from a real estate broker as to reasonable listing prices for the property during the re-listing period or as to the nature of the real estate market in late 2022 and early 2023.
The defendant’s attempt to characterize the sellers’ conduct as unreasonable in the market conditions was rejected as being pure speculation.
Closing date and calculation of damages
As to the date and calculation of damages, the motion judge relied on the propositions for the assessment of damages for breach of an APS:
- The court is to consider context, including “the plaintiff’s duty to take reasonable steps to avoid (their) loss”;
- The nature of the property and the type of market in which the plaintiff is required to re-list and sell the property are both relevant;
- Specific considerations apply in a falling market; and
- A plaintiff who retains the property solely for the purpose of speculation will be entitled to damages assessed as of the original (i.e., failed) closing date.
Taking into account these propositions, the motion judge found that the sellers acted reasonably in their efforts to mitigate their losses, including keeping their property on the market when two deals fell through between August 2022 and March 2023.
Lastly, the court found no evidence to support a finding that the defendant was financially in a position to purchase the property in February 2023, had the sellers accepted her January 2023 offer.
The importance of market context
The court assessed damages at $366,513, which included:
- A $287,500 price difference between the original and resale values.
- $31,906 in carrying costs, such as utilities, taxes, and mortgage interest.
- $47,107 in interest related to financing the sellers’ new build home.
Legal obligations of both purchasers and sellers
The decision underscores the importance of securing reliable financing and understanding the legal obligations of both purchasers and sellers before making a firm and binding commitment to a real estate purchase.
Prospective buyers of a property must appreciate that they need to be fully prepared to close a transaction on the agreed-upon date, failing which they may not only lose the deposit but be faced with a claim for significant damages based upon the current market value of the property.
In a rising market, the seller may be able to obtain a higher price but in a falling market, the price difference may result in damages well in the hundreds of thousands. The seller may also claim additional carrying costs and expenses for maintaining the property which are recoverable as part of the damages.
Written by James R.G. Cook and Delila Bikic
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