MESS AROUND AND FIND OUT: RELIEF FROM FORFEITURE IN REAL ESTATE TRANSACTIONS

This appeal emerges from a real estate transaction that hit a financing snag. The Buyers engaged in an agreement to purchase a residential property in Waterloo, Ontario.  Unfortunately, the deal fell through as their financing became unattainable within the agreed timeframe. Subsequently, the Sellers sold the property to third parties at a higher price and retaining the buyers' deposit. Dissatisfied with the outcome at the Superior Court of Justice, the Buyers appealed the dismissal of their application, seeking specific performance, damages, or relief from forfeiture. In the ensuing analysis, I explore the reasons behind upholding the appeal's dismissal.

The Facts:

This case involves a real estate transaction where buyers entered into an Agreement of Purchase and Sale (APS) with sellers, setting a purchase price of $1,105,000, with a $50,000 deposit and a closing date of December 15, 2021. The APS contained a "time is of the essence" clause, emphasizing the importance of adhering to the specified timelines but allowing for extensions by mutual agreement.

On December 14, 2021, a day before the scheduled closing, the Buyers were informed by their bank that financing would not be granted. On the closing day, the Buyers requested a short extension, and the Sellers' lawyer responded that a written extension request was needed. The Buyers' lawyer submitted the request 47 minutes before the 6:00 p.m. deadline, seeking an extension until January 10, 2022.

The Sellers, claiming an anticipatory breach, terminated the APS at 6:33 p.m. on the closing day, refusing the extension. The Buyers subsequently requested an extension to January 20, 2022, which was also denied. As is their right, the Sellers laid claim to the Buyers deposit.  In Ontario, where a buyer provides a deposit to secure the performance of an APS, the deposit is forfeit if the buyer refuses to close the transaction, unless the parties agree otherwise in writing.

The Sellers, after terminating the APS, sold the property to third parties for $1,235,000 on December 22, 2021; an additional profit of $130,00.00.

The Buyers action at the Superior Court of Justice seeking specific performance, damages, or relief from the forfeiture of their $50,000 deposit. The judge concluded that the Sellers were entitled to terminate the APS and refused relief from forfeiture – they could keep the $50,000.00.   The Buyers appealed, challenging both conclusions.

The Law:

The appellate court upheld the initial judge’s decision, finding that the Sellers were entitled to terminate the APS due to the Buyers' anticipatory breach. The appeals court also agreed with the original judge's refusal to grant relief from forfeiture, considering factors such as the proportionality of the deposit to the purchase price and the absence of evidence supporting unconscionability. The court emphasized the standard nature of the residential real estate purchase and the Buyers' late request for an extension.

The 2-part test for relief from forfeiture under Section 98 of the Courts of Justice Act involves scrutinizing whether the forfeited deposit is "out of all proportion" to the damages suffered by the seller and assessing if it would be unconscionable for the seller to retain the deposit. The judge acknowledged the forfeited deposit was out of proportion to the damages suffered but rightly found it not unconscionable for the sellers to retain it. The judge considered factors such as the standard 5% deposit in residential real estate purchases, the nature of the transaction, bargaining power, and overall fairness. Despite the heated real estate market, the judge concluded that the sellers' refusal to extend the closing, though seen as "hard bargaining," did not reach the level of unconscionability.

Conclusion:

The appeals court confirmed the position of the original judge, dismissed the Buyers’ appeal and awarded costs to the Sellers on a partial indemnity basis in the amount of $18,000.

In conclusion, lawyers, realtors, sellers and buyers all need to understand that the “time is of the essence” clause emphasizes deadlines matter – when there is a problem, communicate early and clearly.  The superior and appeals courts’ unequivocal message here serves as a stern warning to those who mess around, cautioning that they will find out certain actions lead to unforeseen and serious consequences.