Despite the ravaging economic effects of COVID-19, 2020 saw record highs in terms of residential home sales across the country. Unconditional offers to buy a home have become more and more common amidst the current highly competitive real estate market. An unconditional offer refers to an offer to buy a home or other property without any conditions.
As such, conditions that typically accompany purchase offers, such as, those regarding financing and mortgages, property inspection, or the sale of the buyer’s residence, are not attached to the offer to purchase a residential property. The conditions are typically added to a purchase offer to protect the purchaser. For example, if they aren’t able to secure adequate financing, or a home inspection reveals a costly issue, they would be able to withdraw the offer without penalty within a specified time frame. Without conditions in place, an offer, once accepted, will be legally binding on the parties.
Although an unconditional offer to buy a residential property may increase a buyer’s chances to purchase a home in a sought-after neighbourhood or to increase their chances of success in a bidding war, such offers are risky. Where the buyer cannot perform on the offer (i.e. perform the contract), due to financing setbacks or other common reasons, they will be liable for breaching their contractual obligations. Indeed, Ontario courts have held, time and again, that buyers are liable for damages that ensue a failed unconditional offer, insofar as the seller took reasonable steps to limit damages. An Ontario Court of Appeal case, heard on the cusp of the COVID-19 outbreak, underscores the binding nature of unconditional offers in residential real estate.
Ontario Court of Appeal Reinforces Ironclad of Unconditional Offers
In the Ontario Court of Appeal case, Perkins v. Sheikhtavi, the court reaffirmed previous jurisprudence upholding the contractual force of unconditional offers. The case involved a home that was placed on the market in March 2017, for which 13 offers were made. The Sheikhtavis offered to purchase the home for $1,871,000, with a deposit of $80,000 to be held in trust. Despite being the second-highest offer, the vendors accepted, as the offer was unconditional. The parties entered into an unconditional “Agreement of Purchase and Sale” (APS), with a closing date scheduled for July 2017.
Around the closing date, the Sheikhtavis advised the vendors, the Perkins, that they would not be closing on the home, as they were unable to sell their existing home, and therefore could not obtain sufficient financing. Following the failed purchase, the Perkins placed the property back on the market, and the home was sold for $1,251,888, $619,112 less than the initial offer. The vendors sought the difference in sales price as well as carrying costs incurred from the closing date with the initial buyers. The Superior Court of Justice ordered the Sheikhtavis to pay $619,112 as well as the carrying costs. The Sheikhtavis appealed, claiming frustration in addition to the existence of an implied term requiring that the buyer’s residence be sold before purchase.
Court of Appeal: The Buyers Could Have Included a Condition Despite Being Aware of the Risk
Concurring with the lower court’s findings, the Court of Appeal held that this case involved neither frustration nor an implied term. Concerning frustration, something that is destined to occur in a number of residential real estate transactions, the court presented a concise yet rounded overview of frustration in contracts. The court noted that frustration applies to contracts “when a supervening event alters the nature of the appellant’s obligation to contract with the respondent to such an extent that to compel performance despite the new and changed circumstances would be to order the appellant to do something radically different from what the parties agree to under their contract.”
The frustrating event that the appellant relied on concerns a change of government policy, which, they contended, radically changed the real estate market for the worse. According to the Sheikhtavis, the policy change resulted in a reduction in mortgage funds and approvals. In turn, this had triggered the sale of their residence to fall through. However, the court highlighted that a contract will not be frustrated where the “supervening event” was contemplated by the parties at the time of contracting, and was deliberately not provided for in the contract of sale. The judges reminded the court that the appellants chose not to include a condition concerning the prior sale of their residence, and they would reasonably have be aware of the risk involved. The verdict: the initial buyers were held liable for breaching their contractual obligations by not following through with their unconditional offer.
Unconditional Offers for Residential Real Estate: Bottom Line for Buyers
Ontario courts have time and again taken a firm approach in considering unconditional offers. This case underscores the importance of ensuring that buyers are certain they are able to uphold their unconditional offer, as courts are reluctant to cut buyers slack in cases of failed real estate purchases. As such, it is wise for buyers to avoid entering into an unconditional agreement, as changes in the real estate market may not be considered a “frustrating event” by the courts. Considering the unpredictability of the COVID-19 pandemic on personal finances as well as the real estate market, buyers and vendors should remember that unconditional offers, although attractive, can pose a significant legal and financial gamble.
Residential Real Estate Lawyers in Ottawa and Arnprior Representing Clients Across Ontario
At Tierney Stauffer LLP, our real estate lawyers have over 70 years of combined experience representing clients in the purchase, sale or mortgage of a property. We provide our clients with timely service that is cost-effective and personalized. Whether it is the purchase of your first house, the sale of a condo, or refinancing a property, our residential real estate team is ready to assist. Call us at 1-888-799-8057 or contact us online to set up a consultation with an experienced real estate lawyer.