In today’s residential real estate market, purchasers are often lucky if they are able to include the conditional clauses that used to be standard in most Agreements of Purchase and Sale, such as a clause providing for a property inspection or for the purchaser to secure financing. In many home sales today, the competition is so fierce that buyers often have to make an unconditional offer just to stay in contention. However, in cases where an inspection is made a term of the contract, the purchaser will have an opportunity to have a professional property inspector examine the home to ensure there are no defects that need to be addressed, or may even cause the purchaser to withdraw the offer altogether.
In cases where the inspection reveals no major concerns, the clause will be removed and the Agreement will become binding on the parties. During this time between a binding agreement and the transaction closing, when the ownership transfers to the buyer, any damage which occurs to the property is the seller’s responsibility to address. But what happens if the buyer only becomes aware of the damage shortly before closing, and the seller has done nothing to address the issue? The rules around closing a property transaction are strict. If either party refuses to close at the last minute, they risk liability for costly damages. In a recent case, the buyers discovered significant water damage the day before closing, and the parties could not agree on how to resolve the matter, ultimately ending up in court.
Buyers Notice Damage on Day Before Closing
In the case at hand, the buyers entered into an Agreement of Purcahse and Sale with the sellers for a three-story condominium. The buyers agreed to pay $626,800 and put down a deposit of $31,000 with the Agreement. The buyers had included an inspection clause as part of the Agreement, which occurred shortly thereafter. The inspection revealed nothing of consequence, and the Agreement then became binding. On the day prior to closing, the buyers attended at the property to view it one more time and discovered considerable water damage throughout the unit, a result of a break in the water supply when the sellers had the plumbing replaced.
Soon afterward, the buyers’ lawyer sent a letter to the sellers’ lawyer to address the issue. The letter stated that the buyers were ready and able to close (an important point to note in a real estate transaction), with the exception of their concern over the water damage. The buyers proposed two options to the sellers in terms of how to proceed:
- The buyers would hold back $100,000 of the purchase price (rather than transfering the full amount to the sellers on closing), allowing them to have the damage assessed and determine the cost of repair. From there, the cost would be deducted from the holdback and the remainder would be sent to the sellers.
- The sellers would release the buyers from the Agreement, and provide them with $25,000 to cover their costs of renting a temporary home while they looked for a new property to purchase.
The sellers objected to both proposals, countering with a proposal to postpone the closing by three days to allow for an assessment of the damages. In response, the buyers offered to reduce the proposed holdback to $80,000, but otherwise stood firm in their position.
Buyers Commence Litigation to Recover Deposit and For Damages
Three days after the original closing was set to take place, the parties remained at an impasse. The sellers provided an inspection report estimating the cost of the damage at $10,000, and offered a holdback of that amount. The buyers asked for permission to have their own engineer examine the damage, and the sellers refused. The buyers requested an abatement (reduction) in the purchase price of $75,000 plus damages of $5,000, which was rejected. The deal did not close. Soon after, the sellers had the repairs completed for just under $7,000 and resold the property for $665,000. The buyers commenced litigation to recover their deposit, and for further damages.
Court: Sellers Refused Buyers’ Reasonable Request for Inspection
In assessing each party’s stance, the Court observed the information available to both parties at the time the transaction failed to close. The sellers had downplayed the seriousness of the damage, refusing to grant the holdback amounts the buyers had requested. However, to back their position, they provided an estimate they had obtained themselves, and refused to allow the buyers’ engineer to view the damage. Based on this, it was reasonable for the buyers to request a substantial holdback while they assessed the damage themselves.
The Court found the sellers acted unreasonably by refusing to take all steps to ensure the closing could go through as planned, and ordered them to return the buyers’ deposit of $31,000. Further, the Court also awarded the buyers damages totalling $33,110 to cover their costs associated with temporary housing, and other expenses.
Residential Real Estate Lawyers in Eastern Ontario and North Bay Representing Clients Across Ontario
Any party to an Agrement of Purchase and Sale must exercise caution if the closing is threatened for any reason. Failure to honour reasonable requests leading up to closing could result in costly litigation, as was the case here.
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 member of our team.