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Don’t sign if you’re not willing to sell your real estate

When parties agree to buy and sell real estate, they are obligated to honour the agreements they...

When parties agree to buy and sell real estate, they are obligated to honour the agreements they make.

This may sound obvious, but as property values have risen sharply over the past few years, sellers’ remorse has become more prevalent and there have been many instances where sellers have signed purchase agreements and later refused to close.  In some cases, a better offer was accepted, and in others, the seller simply did not want to part with a valuable asset.

Courts have not been gentle when dealing with sellers who refuse to honour their agreements. In some instances, sellers have been forced to complete the transaction, and damages have been awarded to buyers for the loss of value in other cases.

A clear message is consistently sent that deals cannot be broken without consequence.

A better offer doesn’t negate a sale agreement

For instance, in the recent decision of Grayson v. Creasy, two parties entered into an agreement for the purchase and sale of a real estate asset.  The agreement was entered into in January 2021 with a closing date in March 2021.

The agreement had three conditional clauses, including a clause which permitted the seller to keep marketing the property after the agreement was entered and before the transaction completed.

The court referred to this term as the “escape clause” and it allowed the seller to seek a better offer for the property. If a better offer was received, the buyer would get 24 hours’ notice to waive the conditional clauses or confirm that they were fulfilled after receiving notice of the new offer. If the buyer did not waive the clause, the agreement would be voided.

However, the clause was not clear as to whether the buyer should have the opportunity to complete the purchase if the seller did receive a better offer.

In that case, the seller received  a much better offer from another potential buyer.  The seller entered into a new agreement with the second buyer, which was conditional on the seller being able to get out of the original agreement.

The day after it entered into the second agreement, the seller’s realtor wrote to the original buyer and informed them that they were going with a different offer for the property and 24 hours’ notice was given to waive the conditional clauses. The original buyer sent the seller a notice within the 24-hour period  confirming that it had fulfilled the conditional clauses and was prepared to close the transaction as per the terms of the agreement.

Buyer fulfilled its obligations

The seller then claimed that the original buyer did not waive the escape clause and it was therefore permitted to go with the second buyer. The transaction was completed with the second buyer in accordance with the new agreement.

The original buyer sued the seller and sought damages for breach of the agreement of purchase and sale.

The court looked closely at the escape clause and put it in context. It was determined that the clause was clearly included for the sole benefit of the seller, insofar as it gave them the opportunity to seek out a better offer and, if they found one, the buyer had a short window to set their conditional offer in stone or risk losing the property altogether.

Once the seller notified the buyer of the new offer, the buyer became immediately obligated to waive or fulfill the conditions if it still wished to purchase the property.  The buyer did indeed take those steps by fulfilling the first two conditions in the agreement of purchase and sale.

The court held that the buyer was not obligated to expressly waive the escape clause itself or match the offer put forth by the new buyer. It noted the seller’s argument that the buyer had to waive the clause itself did not make sense. The fact that the buyer fulfilled the first two conditions when the seller triggered the escape clause showed the buyer’s willingness to purchase the property as per the agreement.

It was held that the seller acted in breach of the agreement by refusing to close the deal.  Since the property had been sold to a different party, the buyer was entitled to damages.

Seller terminates deal, pays damages

Similarly, in Chang v. Hung, a seller refused to close on a valid agreement. The agreement contained a “deposit clause” which stated if it was terminated as a result of a breach on the part of the seller, the deposit would be refunded and the deal would be at an end.

The seller breached the agreement by terminating it unilaterally and the buyer sued for damages. In defending the action, the seller argued that the deposit clause meant the buyer waived its right to claim damages.

The court did not accept this argument and it was held that a party to a valid contract (in this case, the buyer) cannot waive its right to claim damages for the other party’s breach unless there is a clear, unambiguous agreement to do so.

In that case, the deposit clause did not state the buyer was giving up its right to sue for damages, nor was there evidence that any such agreement was reached between the parties. The buyer was therefore awarded damages, which was the difference between the appraised value of the property on the date of the seller’s breach and the price the buyer would have paid for it.

In other recent instances, sellers have faced more than just damages for failing to close real estate deals.  If the purchase agreement does not limit a buyer’s right to claim damages and the property has not been sold to another party, buyers have been able to force sellers to honour the deal.

Buyer wins in case of seller’s remorse

For instance, in Thillairajan v. Sivasubramaniam, a buyer and seller entered into an agreement of purchase and sale for a property with a two-month closing.

A week before the closing date, the seller informed the buyer through its real estate agent that it no longer wished to sell the property. In response, the buyer immediately stated it intended on closing the deal and attempted to do so on the closing date. The seller refused to close.

The buyer sued the seller, seeking specific performance of the agreement of purchase and sale and secured a certificate of pending litigation on the property.

In determining whether to grant specific performance, the court noted the two most important factors – namely, whether the property was unique and whether a substitute was readily available.  It was also held that other factors also come into play when considering this remedy, such as the nature of the property, whether damages are an adequate remedy and the behaviour of the parties involved.

To determine if a property is unique, it does not just come down to whether other similar assets exist in the same geographical area.  Rather it must be shown the other properties were readily available for the buyer to purchase after the seller breached the agreement.

In this case, it was held that the property in question was uniquely suited to the buyer’s specific needs, given its price and location. Other similar properties were not readily available for the buyer to purchase.

In terms of other available remedies, the court stated the buyer would not likely be able to recover any damages if specific performance was not awarded.

As such, given the property was held to be unique and the seller’s breach, specific performance was awarded and the seller was ordered to transfer the property to the buyer.

These cases all serve as rightful cautionary tales for sellers who refuse to honour deals they entered into. If a seller refuses to close on a valid deal, it will likely prove to be a losing battle, and a costly legal affair to boot.

Sellers would be wise to keep this in mind, as sellers’ remorse becomes more prevalent with rising property values.

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