Authored by: Andrew Wray and Sam Zargami

In Ontario, parties to a real estate transaction sign an Agreement of Purchase and Sale (“APS”) which outlines the agreed upon terms between the parties involved, including among other things, the purchase price and closing date. If either party cannot close the transaction by the closing date, they will default on the APS, causing significant legal and financial risk.

A purchaser who unlawfully backs out of an APS could lose their deposit and risk being sued by the seller for losses if the home is resold at a lower price. A seller who unlawfully cancels an APS may be required to pay damages and, in rare cases, be forced to sell the property. However, in some circumstances, a purchaser may cancel an APS if the seller has made misrepresentations or failed to fulfill their contractual obligations.

Rescission of Contract

A purchaser may want to rescind an APS due to:

1. changing financial circumstances (i.e. loss of employment, rising interest rates);
2. inability to obtain financing;
3. realizing that they bid too high;
4. no longer having interest in the property; or
5. relying on the sale of their current property.

A seller may want to rescind an APS because of:

1. changing market conditions;
2. regrets about selling the property;
3. trouble finding a new home;
4. realizing that they accepted a low bid; or
5. changing personal circumstances;

Rescission of APS by Purchasers

A purchaser can rescind the APS if the seller or its realtor made a misrepresentation which induced the purchaser to sign the APS. The Ontario Court of Appeal in Issa v Wilson allowed the purchaser to rescind the APS and reclaim his $50,000 deposit because of the seller’s misrepresentation of the property’s square footage. The seller indicated that the property was 2100 square feet, which was confirmed by the MLS listing. The parties signed an APS, and the purchaser transferred a deposit cheque for the property. The dispute arose when the purchaser later received a mortgage appraisal on the property which revealed that the property was only 1400 square feet.

The Ontario Court of Appeal found the seller’s misrepresentation was material to the purchaser’s signing of the contract because:

1. The realtor made explicit statements about the incorrect square footage and admitted at trial that he was negligent in not confirming the measurements;
2. The discrepancy for the size of the property is substantial;
3. The purchaser was prepared to close the purchase until learning of the misrepresentation; and
4. The purchaser was young and inexperienced in buying a home.

A purchaser can withdraw from an Agreement of Purchase and Sale (APS) and seek a return of their deposit if the seller breaches contractual obligations. In Ching v. Pier 27 Toronto Inc., the Ontario Court of Appeal highlights that a purchaser must promptly identify the breach, notify the seller that they consider the APS invalid, and request a return of the deposit. In this case, the purchaser could have rescinded the APS for a pre-construction condominium due to unauthorized extensions of the completion date but failed to do so. Instead, by attempting to assign the property and asking for inspections, the purchaser acted as if the APS was still binding, forfeiting their right to back out.

Rescission of APS by Sellers

A seller’s option to rescind an APS without liability is more limited than that of the purchaser. If a seller decides to back out of an APS, they should work with the purchaser to obtain their consent to cancel the APS, releasing both parties from their contractual obligations. Alternatively, a proactive seller may include a clause in the APS that allows them to back out of the agreement.

Otherwise, rescinding an APS can expose a seller to liability as the purchaser can sue for breach of contract and seek remedies in the form of damages or specific performance.

If a seller backs out of an APS, the court most commonly awards damages to compensate for the purchaser’s financial loss. In calculating damages, courts will consider the increased value of the property, lost equity, and various costs incurred by the purchaser for inspections, appraisals, or realtor commissions.

If compensation is insufficient to remedy the purchaser’s loss, the court may, in rare circumstances, order specific performance, compelling the seller to sell the property to the purchaser. Compensation may be an insufficient remedy for the purchaser if the property is unique. Please visit our previous blog for a detailed explanation of the remedy of specific performance and uniqueness.

Takeaways

As experts in real-estate litigation, we often advise parties when reviewing potential liabilities arising from an APS.

Sellers and real estate agents must take steps to ensure that all the representative features and measurements of a listed property are accurate.

Sellers should also be certain about their decision to sell a property prior to entering an APS. Furthermore, if a seller is uncertain about selling a property, they should consult a lawyer to draft an APS that includes clauses allowing the seller to rescind the APS with minimal or no liability.

Sellers and buyers may contact us at any time regarding their questions on their rights.