When you purchase real estate in Ontario, the first step is signing your Agreement of Purchase and Sale (APS) or commonly referred to as the Offer.
Often, the Offer is not reviewed by a lawyer before it’s signed by both parties. The usual procedure is that one or more realtors prepare the Offer based on the OREA form, and then the buyer and seller review it themselves and sign it.
However, your realtor can add a “solicitor review condition” on the contract. This means that even after signing the contract, either side can get a lawyer to review the contract, and back out of the agreement if there is something legally wrong with it.
But this does not mean you can back out for non-legal reasons. The lawyer must be able to find a valid legal problem with the agreement. For instance, if the contract did not guarantee that there is no litigation relating to the property, then the lawyer can insist to add that in. If the other side disagrees with that clause, then you can back out of the contract.
In contrast, if there is nothing legally wrong with the agreement, then you cannot use the solicitor review condition to back out. Let’s say you decided that you no longer like the colour and shape of the windows. You cannot back out because of this non-legal reason.
Regardless, what happens if either party decides to breach this Offer? Let’s explore further below.
Terms vs. Conditions
First, we must separate the terms from the conditions. A condition is usually a reason that allows either party to back out of the contract, no problem. Conditions are often added by realtors at the end of the Offer.
Common conditions include financing condition, meaning that the buyer must first get mortgage approval before they purchase the property. If the buyer fails to get mortgage approval, then they can back out of the contract.
Another condition is the property inspection condition. The buyer may hire a professional company to inspect the property and note any damages. If there are damages, the buyer can choose to accept it, ask the seller to make repairs before closing, or back out of the contract.
Because most conditions allow you to back out of the contract, Offers with conditions is considered a non-binding contract. Only after all the conditions are waived, is an Offer consider “firm” and ready to proceed.
During the process of waiting for conditions to be removed, the seller cannot accept other new offers with no conditions.
Major Breaches
Once all conditions are waived, then the Offer becomes binding – meaning no one should be breaching its terms. Unfortunately, this still happens during the course of the purchase/sale.
There are two types of breaches, major and minor.
Major breaches are those that cannot easily be fixed AFTER the closing date with money. The following are examples of situations that COULD be considered a major breach (each case is different though and must be assessed on a case-by-case basis):
- The buyer changes their mind and refuses to pay for the property
- The seller agrees to pay off all debts on the property, but they do not payout a private mortgage on title before closing as agreed in the APS
- The seller refuses to leave the property (refuses to give “vacant possession”)
- The seller agrees to make substantial renovations or repairs in the APS, but then refuses to complete the renovations or repairs
- The seller agrees to allow a home inspection as a condition of the sale, but when the inspector arrives for the inspection, the seller refuses access to the property and will not allow an inspection
Essentially, these are major breaches that cannot easily be repaired after the closing date by completing a relatively simple task, or the payment of a smaller amount of money. If it is a major breach, known to lawyers as a “Fundamental Breach”, the APS can be terminated, and the wronged party can sue the other person for any losses they suffer.
Example #1: Joe agrees in the APS to replace the entire roof and 2 windows before the closing date, but doesn’t have the money to do the repairs, so he doesn’t replace the roof or windows. This is a major repair. Since the seller failed to make this major issue, this may be considered a major breach.
Example #2: Joe agrees to allow an inspection of the property after his real estate agent insisted it be included in the APS. Joe changes his mind though and refuses access for the inspection. Here, the buyer could declare the APS has been fundamentally breached since the inspection was a “condition” that is necessary for the sale.
Minor Breaches
Minor breaches are those that can be repaired after the closing date by completing a relatively simple task, or by paying the non-breaching party for the breach.
The following are examples of situations that COULD be considered a minor breach (each case is different though and must be assessed on a case-by-case basis):
- The washing machine does not work, or has been taken by the sellers contrary to the APS
- The property should be in “broom swept condition”, but there is garbage on the floors and is extremely dirty
- The seller is supposed to repair a relatively inexpensive part of the property, but fails to do so by the closing date
- The seller agreed to remove playground equipment from the back yard, but then refuses to remove it on the closing date
Essentially, these are minor breaches that can easily be repaired after the closing date by completing a relatively simple task, or the payment of money.
If it is a minor breach, the APS can NOT be terminated due to the breach alone. The sale would have to continue, but the breaching party could be held responsible for their breach.
They may have to negotiate a price change before the closing, if possible, or they may get sued after the sale is finished, but they cannot declare that the agreement is terminated for minor breaches like those listed above. It is important to note that the party’s liability is limited to the actual value of the harm caused and them and the wronged party must have receipts or other proof of the exact value of the damages. If the APS includes a fridge that is 5 years old, you can sue for the actual value of a 5 year old fridge.
Example #3: Joe agrees to repair the front doorbell before the closing date but doesn’t want to do this since he is too busy. This is a minor repair. Since the seller failed to make this minor repair, the buyer could demand a price reduction prior to closing, or they could sue Joe for the doorbell’s actual value after the closing date, but they would NOT be able to refuse to complete the sale for such a minor breach.
Example #4: Joe agrees to provide vacant possession (he and his belongings are gone) but doesn’t get the trash removed from the back yard. The buyer’s lawyer could negotiate a price reduction, or the buyer could sue after the closing if they suffer financial losses, which must be specifically quantified with receipts or invoices, as noted above.
What Are the Actual Consequence s of Major and Minor Breaches?
Termination of the APS
As noted above, only major breaches can permit the legal termination of the APS. If a breach is a major breach, like those listed above, the APS can be terminated and the non-breaching party can sue the other party for their losses.
Specific Performance – Forcing the Completion of a Sale (Very Uncommon)
If a seller refuses to close on a sale, the buyer can sue the seller for damages, but, in some very rare cases, they could also sue to have the sale completed.
This very rare remedy is only permitted where the seller cannot fix their breach with money. In law, this remedy is exceptionally rare and the buyer must show that the property is truly one of a kind
Example #5: James owns 1 Jones Street and 3 Jones Street. Bob agrees to buy both to build his home on. After completing the closing on 1 Jones Street, James changes his mind and doesn’t complete the sale of 3 Jones Street. Bob sues James to force the completion of the sale since 3 Jones cannot be replaced with another property. Note, if Bob didn’t already close on 1 Jones Street, 3 Jones would not be unique, and a forced sale would be impossible. Instead Bob would just sue for financial damages for the breach of the 2 properties.
Price reductions– (Very Common)
If a seller refuses to comply with the terms of the APS, the buyer, or their lawyer, may negotiate a price reduction. For example, if a seller fails to repair the doorbell, as in the example given above, the buyer and seller may agree to a price reduction, if this defect is discovered before the final closing on the property.
If it is discovered after, the parties would need to negotiate a settlement where the seller would refund the buyer for a portion of the sale price.
Holdback
If the seller refuses to repair the doorbell before closing, the parties may agree to a holdback. With a holdback, one of the lawyers will hold an agreed upon amount of money until the repair is completed. For example, the buyer’s lawyer would hold $500 dollars for the repair of the doorbell. The seller would pay for the doorbell repair after the closing instead. Once the doorbell is repair, the buyer’s lawyer release the final $500 to the seller’s lawyer.
Please note, holdbacks, although common, can be refused by the seller’s lawyer, if this right is not guaranteed in the Offer. The best solution is to have the realtor draft hold-backs terms within the Offer before signing it.
Lawsuits – Common when the parties cannot agree on a solution
Using the doorbell example, if the buyer and seller have completed the sale and cannot agree on a solution for the doorbell, the buyer may have no choice but to sue the seller in Small Claims Court.
However, Small Claims Court can be very complex and legal fees, even through a paralegal, can be several thousand dollars.
Forfeiture of deposit money – Often requires a court order
When a sale doesn’t close due to a breach by the buyer, the seller is generally entitled to the deposit.
However, because the deposit is typically held by the realtor, a court order is often necessary to get the realtor to release the deposit to any of the parties, even if it is just refunding it back to the buyer. If the realtor refunds the money and a judge says they shouldn’t have, they could be held responsible.
Example #6: The seller agrees to include a microwave and agrees to clean all appliances. When the buyer does a final inspection, they see the microwave has been removed and the house is very dirty. The buyer gets angry and refuses to pay for the house. Generally speaking, the seller would be entitled to keep the deposit and could relist the property for sale, as their breach did not constitute a fundamental breach.
Unfortunately, the seller will almost always need to sue the realtor to get them to release the deposit, since the realtor doesn’t want to be responsible for making the wrong decision regarding the deposit.
How to Avoid Risks
The risks above are serious, but there are ways to reduce some of the risks:
- Have APS reviewed by your lawyer before you sign so additional clauses can be added. When an APS notes that a term to the agreement is serious, it will make the breach of that clause more serious, which may allow you to terminate the agreement if needed.
- Discuss every section with your realtor. Some clients rely too much on the verbal assurances they get from their realtor when it comes to the clauses in the agreement. Always review every clause in the agreement
- Ask your realtor to put in hold-back clauses if certain terms are breached, and specifically mention the amount of hold-back (e.g. if the broken window is not repaired before closing, then the buyer’s lawyer shall hold back $5000 until they are repaired)
- Ensure you have multiple inspection opportunities so you can discover any defects requiring repair early
- Always have the property inspected by a qualified home inspector
- Always have your lawyer do full property searches to ensure nothing gets missed, like outstanding taxes, for example
Conclusion:
As you can see, there are many different ways and APS could be breached and many different consequences can occur, depending on the nature of the breach. To understand these risks better and to avoid them from happening to you, we strongly advise that you hire an experienced real estate lawyer for your purchase or your sale.
If you have any questions regarding a potential property purchase or sale, we invite you to book a 1st free consultation with us: https://calendly.com/sabrina-668/1stfreeconsult
