January 15th 2025
In real estate transactions, the period between the formation of the contract and the closing date presents unique risks to buyers and sellers. Most real estate contracts stipulate that the property be delivered in substantially the same condition as it was in at the time of the agreement. Unexpected occurrences can result in damage to the property after the contract is signed, but before ownership is transferred. For instance, a flood or fire could render the property uninhabitable on closing, or significantly reduce its market value.
If damage to a property occurs, the buyer may face financial or logistical burdens, such as delayed closings, repair costs, or the risk purchasing a property with a significantly diminished value. In this two-part newsletter, we will first consider a few cases that describe property damage and the rights of buyers and sellers. In our next instalment, we will discuss the ways your real estate lawyer can help you manage your risks if intervening damage happens to you.
How Bad is Too Bad?
One of the most important concepts in real estate law is the nature of a fundamental or substantial breach. If damage is substantial, a buyer will need to speak with their lawyer about their options. Most standard residential contracts (Form 100) have an insurance clause. In recent versions, this clause appears at paragraph 14 and has the following key features:
The meaning of substantial damage is the source of much controversy. In the case of Tsui v Zhuoqi, 2021 ONSC 5421 (CanLII), the Court held that a seller acted unreasonably in refusing to permit a purchaser to investigate the nature of the damage through an engineer. In this case, the damage related to a flood, and the seller denied such damage was substantial. When the seller refused to cooperate with ongoing inspections, the purchaser eventually refused to close the deal and demanded its deposit back. The Court decided in favour of the purchaser and held the seller liable for returning the deposit in full, among other costs, including the purchaser’s rent in a new property, moving and parking fees representing over $30,000 in costs.
In the case of Pordell v Crowther et al., 2020 ONSC 1635 (CanLII), the Court clarified that any event of damage that may rise to the level of “substantial damage” requires the seller to provide “timely notice and a meaningful opportunity to inspect the property”, even before the seller attempts to undertake repairs. This is especially true in the event of fires, since a repair completed without the benefit of the buyer’s inspection means underlying issues may have been unsatisfactorily “covered up”.
In both the cases of Tsui and Pordell above, the buyers refused to close the contract and were entitled to the return of their deposit, with interest and legal costs. These cases show just how careful sellers must be to act in “good faith” when damage happens to the sale property.
Contrastingly, if damage is not “substantial”, a buyer cannot refuse to close the transaction. In Bilotta v Booth, 2020 ONCA 522 (CanLII), the Court held that a purchaser was not entitled to refuse to close the deal. When the seller finally sold the property to a new purchaser, they sold at a $100,000 loss. The seller successfully sued the purchaser for their loss, less the $30,000 deposit credited to them. The case of Bilotta shows that purchasers cannot use trivial damages to try and escape a contract. Parties are expected to act reasonably and in good faith when minor damages occur.
Summary
The nature of substantial damage requires legal advice, since the timing of the damage and opportunities to repair before closing will heavily impact how a purchaser and seller should behave. Under paragraph 14 of the current standard residential contract, a buyer is permitted to “take the proceeds of any insurance and complete the purchase”. However, the amount of insurance proceeds is only the starting point for negotiations when substantial loss actually occurs. This insurance section is meant to protect a purchaser, since a seller cannot rely on “force majeure” to escape the contract. Otherwise, a seller might be able to argue that an unexpected event has frustrated closing, so it should be excused from liability!
Luckily, the majority of real estate closings are able to be resolved without litigation. In our next article, we will explore the types of negotiations that lawyers may invoke, including holdbacks, adjustments, and notice of anticipatory breach and demands for mitigation.
If you are looking for legal advice for your real estate transaction, reach out to michael@liddiardlaw.ca
Michael Liddiard, BA MA JD
Liddiard Law Professional Corporation
michael@liddiardlaw.ca