It’s a question that gets asked quite often – what happens if the Buyer doesn’t close our deal?
This is a complex question and full of potential what-ifs including what a judge might do in sympathy to a Buyer who can’t close.
In its simplest form, the rule of thumb is that the Buyer is fully responsible for the closing of a transaction and the failure to do so can, and does have significant implications. There are some misunderstandings that the Buyer’s costs for not closing are limited to the deposit they have made.
That is not correct – in fact, the Buyer could be (and is in most cases) responsible for all of the damages that the Seller incurs as a result of the failure of the Buyer to not close the transaction. This could include all of the Sellers’ costs like interest costs, taxes, legal fees and perhaps most importantly, any loss on the resale of the property. What does this really mean? A recent case in BC highlights the concerns and these basic rules.
The Importance Of Financing Conditions
A Buyer purchased a property in 2022 in the Okanagan for $1,115,000, over $116,000 higher than the list price with a $30,000 deposit. They didn’t have a financing condition as it was decided that their offer should be “clean” despite the fact that they needed a mortgage. I suspect you can guess what happened next.
The Buyers shopped around but the lenders appraised the property significantly lower than the purchase price. The Seller gave a few extensions to give the Buyers more time to obtain financing. They ultimately couldn’t and didn’t have the cash reserves to close the deal. The deal fell apart but in the interim the local market cratered.
The house went back onto the market for $949K – 5 months later it sold for $740k. Close to $400k less than the original Buyers had purchased at. The BC court found the Buyers not only liable for the deposit but also all the loss of sale resulting in damages of over $400k payable by the Buyer to the Seller for lost income, etc.
In the end, the Court was correct in its decision – Buyers are responsible for the actual damages caused by their breach of contract. The danger for any defaulting Buyer is that the fast rise of markets and the froth it creates with unconditional offers can, and does, catch Buyers when the game of musical chairs ends and prices decrease. With over-list offers comes the risk of a market correction that catches the other side of the equation.
The Risks of Submitting an Unconditional Offer
The Calgary market is currently in this area of froth. There are still properties selling for well over list price with offers without any conditions. The risk is immense if you are a Buyer who is going to depend on financing to complete the deal. A pre-approval is not a formal approval as it doesn’t take into account the property or the state of the property – it only confirms that you, as the Buyer, can qualify if a suitable property that appraises to the satisfaction of your lender is found.
With changes in markets, lenders are apt to require formal appraisals – this is now happening in Toronto and Vancouver and the consequences will be severe to unsuspecting Buyers.
Before submitting an unconditional offer, look deep into the mirror and understand the risk you are taking and what the consequences are. Your agent may even encourage you to do so for various reasons but this is ultimately a game you may lose by winning.
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