No matter what type of property you purchase in Ontario, you will almost always be required to enter into a contract which governs the transaction. Typically, these contracts outline the terms that the parties agree to regarding the purchase and sale of the property, including subject clauses (clauses outlining what the purchase and sale is “subject to”) and a “closing date” which is the date that the property will be transferred from the seller to the buyer. But what happens if something goes wrong between the signing date, subject removal date, and completion date?
In this blog post, we will review various breaches of real estate contracts – including common causes of a breach on the buyer’s side and remedies for breach of a real estate contract.
Each real estate contract will likely contain different terms and subject clauses, and complications may arise depending on the contract. If you have questions about a real estate contract, consult with a reliable experienced real estate lawyer.
What is a Breach of Contract in Real Estate?
Breach of a real estate contract can occur when one or both of the parties to a real estate contract fail to fulfill a term of the contract, rendering them unable to complete the agreement.
Common Examples of Real Estate Breach of Contract – for Buyers
There are several reasons why a buyer may end up breaching the terms of a real estate contract. Some common examples include the following:
- Failing to secure financing for the property. If the buyer is not paying cash, they will need to obtain financing for the property to complete the deal. In some cases, financing can fall through before the contract completion date.
- Failing to transfer funds for the property. If the buyer is paying cash, they will need to transfer funds to complete the deal. However, the buyer may be unable to transfer the cash to the seller’s lawyer to complete the deal, for example, issues with wiring funds.
- Failing to complete legal documentation. In some cases, the buyer may be unable to complete the appropriate legal documentation for the transaction. This may occur when the buyer is in a remote area and cannot meet with a real estate lawyer to sign documents before the closing date.
- Choosing to breach the contract. A buyer might sign a real estate contract and later decide they do not want to go through with the purchase. Without another “out” (for example, relying on a subject clause), the buyer will have to walk away from the contract.
- Acting in bad faith. A common example of bad faith occurs when a buyer fails to remove a subject clause but does so in bad faith. Subject clauses are not a “get out of jail free” card that allows buyers to back out of a deal.
Breach of Real Estate Contracts and Subject Clauses
Subject clauses are included in real estate contracts to protect buyers and sellers. These clauses are included in real estate contracts as a way to terminate the contract if something goes wrong before the subject removal date.
Examples of common subject clauses in real estate contracts include:
- Subject to financing. Many buyers rely on a mortgage to purchase property, so it is common to see a “subject to financing” term in real estate contracts. These clauses make the real estate contract conditional on the buyer securing financing for the property.
- Subject to sale of another property. These clauses are included where the buyer needs to sell another property before purchasing the subject property. These clauses make the real estate contract conditional on the buyer selling another property within a certain period.
- Subject to a satisfactory inspection. Many real estate contracts include a subject clause allowing the buyer to obtain a home inspection. These clauses make the real estate contract conditional on the property’s condition. In other words, if the home inspector identifies issues with the property, the buyer can elect not to proceed with the contract.
It is important to note that subject clauses are only relevant if they are included in the real estate contract. For example, if you enter into a real estate contract that does not include a subject to financing clause and you are unable to obtain financing, you will be on the hook for a real estate breach of contract.
However, it is also important to remember that subject clauses do not freely give buyers the ability to walk away from a real estate contract simply because they change their mind. For example, suppose the buyer claims that they are unable to remove the subject to financing clause because they were not happy with the mortgage options available to them. In that case, the seller may be able to argue that the buyer acted in bad faith and breached the contract.
What are the remedies for a breach of a real estate contract?
So, what happens if a buyer breaches a real estate contract?
A frequently sought-after remedy is forfeiture of the buyer’s deposit, meaning that if a buyer does not close the deal, their deposit money will go to the seller.
However, it is increasingly common to see sellers seeking redress beyond the retention of the buyer’s deposit. Take, for example, a recent case we covered where the seller sought additional damages due to the property’s value decreasing after the deal fell through.
Additional Thoughts on Real Estate Breach of Contract in Ontario
Entering into a real estate contract is a big step, which is why it is critical to ensure that you can fulfill your obligations under the contract.
However, many buyers feel that they need to move quickly and enter into contracts before they are truly ready to proceed, especially in a hot real estate market. To avoid breaching a real estate contract, consider the following tips before signing any contract:
- Take your time and do not jump into a real estate contract before critically considering your budget, financing, and interests;
- Make good use of subject clauses in your real estate contract to ensure you are protected if something goes wrong; and
- Retain an experienced real estate lawyer early in order to obtain proactive advice on your obligations, gather documents, and get ahead of any issues or disputes that might arise before the closing date.
The Oakville Real Estate Lawyers at Campbells LLP Represent Buyers, Sellers, and Professionals in Real Estate Transactions
Whether you are buying your first home, purchasing a cottage or looking to downsize, the experienced real estate lawyers at Campbells LLP will guide you through each step of your residential real estate transaction. We can provide a review of all relevant paperwork and contracts, negotiate on your behalf, and defend your interests in the event that a dispute arises.
Our firm provides tailored legal services in order to meet your real estate law needs. To speak with one of our experienced real estate lawyers or to schedule a consultation, fill our our online form or call us at 905-828-2247.