Spooked Toronto buyers risking deposits by failing to close deals
By AdvocateDaily.com Staff
Toronto real estate lawyer Daniel Bernstein says buyers spooked by the city’s suddenly stuttering real estate market are putting their deposits at risk if they try to back out of closing a deal.
A BNN report says Toronto house prices have fallen by a fifth since their peak value in April, while total resales in July were down a massive 40 per cent over the same period last year.
The market has cooled significantly since the imposition of a 15-per-cent foreign buyers’ tax on the purchase of residential properties in the Greater Golden Horseshoe Area, which takes in communities all the way from the Niagara Region to Peterborough.
All that uncertainty has caused many buyers to think twice about closing deals agreed upon months ago, Bernstein, a founding partner with Weltman Bernstein, tells AdvocateDaily.com. In addition, some mortgage providers may balk at providing funds for a property that has lost 20 per cent of its value in a short period, putting buyers’ financing arrangements in doubt.
“I’ve had a couple of deals that went sour, and from speaking to colleagues, there seems to have been an upsurge in deals not closing,” Bernstein says. “But what happens to buyers who can’t or won’t close is they are going to lose their deposits.”
Bernstein explains that the law strongly favours blameless vendors who want to seize a deposit following a failed deal.
“They don’t have to prove damages. As long as the deposit is viewed as a genuine offer in earnest, and it is not seen as a penalty, the seller is entitled to it,” he says, noting that the key precedent on point dates back to a Victorian era case from the U.K.
While there are no hard and fast rules about when a deposit crosses the threshold of being considered a penalty, Bernstein says anything less than 10 per cent of the purchase value is typically seen by the courts as a fair amount.
The only wrinkle for sellers is that they can’t get their hands on the deposit without a court order unless all parties agree.
“The agents and the buyer all have to sign off, and sometimes those releases aren’t forthcoming, so you have to go to court,” Bernstein says.
In the event the dispute escalates, he says vendors may be more open to finding an alternative resolution, depending on their own situation and willingness to become involved in potentially protracted litigation.
“If the seller is renting, then they’ve got more time to go after the buyer. If they have to sell later at a lower amount, they can even go after the failed buyer for damages in addition to the deposit,” he says. “But if they’re closing their sale and purchase on the same day, it becomes more difficult for a seller and they may have to negotiate with their buyer to save both transactions.”