Backing out of a real estate deal: what to look forApr 17 2023
With the shift in the housing market, we’ve received many calls by buyers wanting to get out of deals or sellers after the buyer failed to complete the sale. This post focuses what you should look for in your contract and the potential risks for breaching a contract for purchase and sale of a property.
Can you get out of the deal?
The sale of real estate must be in a written contract. In general, you are bound to keep the promises you have agreed to in a contract that you have signed. For advice on a particular scenario, you need to speak with a lawyer.
Again, generally speaking, if one of the parties is ready, willing, and able to complete the contractual deal and the other party is not, the non-completing party has breached the agreement. In this day and age this typically looks like the seller being ready to complete, but the buyer does not have the money.
Breaching a contract carries certain consequences that depend on what your contract says.
What to look for in your contract:
Check the subjects:
One of the ways an agreement can be ended without being considered a breach, is if the wording of the agreement itself allows for the contract to be terminated.
A ‘condition precedent’ or a ‘subject’ is a contractual term that says, “If ‘x’ event occurs or does not occur, the deal will not complete.”
You commonly see subjects such as “subject to inspection” meaning that the buyers will not be considered to be bound to complete the deal until they have obtained a satisfactory home inspection, for example.
However, if the reason you are wanting to terminate the contract is not a reason listed in the agreement itself, you have likely breached the agreement. That is, if your sale is subject to inspection and you are now not wanting to complete because interest rates have increased then you are likely in breach of the agreement.
You cannot rely on external representations:
Note that most standard-form purchase and sale agreements contain a clause stating that no external promises, representations or warranties can be relied on outside of the contract.
This means that if you went into a deal based on a verbal promise from the seller, a builder -or even your own realtor- you cannot rely on that promise. If the promise is not fulfilled or the representation was false, this is not a valid reason for you to breach the contract.
You would have to draw on other legal doctrines, such as negligent misrepresentation of a professional person, to argue that perhaps these parties are liable for your reliance on their promises.
What are the risks?
Breaching a contract attracts the risk that the innocent party will bring a claim against you: either for monetary compensation, or for specific performance to enforce the terms of the contract.
Damages or monetary compensation in most cases:
The basic principle in damages for breach of contract is that the parties should be put in the position they would have been in had the contract been properly completed.
You should check whether your contract has a term limiting damages to the amount of the deposit. This means one or both parties may not be able to ask for more money after a deal falls apart.
If there is no term stipulating the loss of the deposit either way, then the presumption is that an innocent seller is entitled to keep this deposit where the buyer breaches the contract. The buyer, in limited circumstances, is able to make arguments in ‘equity’, a sub-area of law allowing the court to decide otherwise where this presumption would result in disproportionality or unfairness.
An innocent party cannot claim monetary compensation for losses that could have been reasonably avoided.
This is the duty to mitigate: i.e., to find another property or to re-list your property on the market for resale in a reasonable amount of time.
Whether the breach of a contract occurs in a rising or a falling real estate market can impact the analysis. For example, if you were able to sell the property for more money due to a sale not completing, you probably do not have damages against the original purchasers. Alternatively, if prices have gone down and you can only sell for less than you may be owed the difference in the sale prices.
Specific performance where property is unique:
In extraordinary cases, the deal you contracted for was on a property so unique and rare that monetary compensation may not make up for what you will lose. It may be that the location and/or aspects of the house are very specific to the needs of your family which are not available in other properties.
If this is the case, the court may order that despite the breach the property must still be transferred. You will want to continue to follow the terms of the contract as best you can to argue that the contract is still alive and should be enforced on the other party.
To find out more about the breach of real estate contracts and the type of legal remedies that may be available to you, you can reach our Civil Litigation Team by calling our office at 604-853-0774 to request a consult today.