Failure To Close An Agreement Of Purchase And Sale In The Context Of Covid-19

• Published date: 18 March 2021
• Subject Matter: Real Estate and Construction, Coronavirus (COVID-19), Real Estate, Litigation, Contracts and Force Majeure
• Law Firm: Devry Smith Frank LLP
• Author: Ms Stephanie Turnham

The COVID-19 pandemic has lead to noticeable changes in the real estate market in the GTA as well as to a general recession, according to Statistics Canada. While detached houses and living space in the suburbs in general increased in value, smaller living spaces such as condominiums are in very low demand.

Purchasers who entered into an Agreement of Purchase and Sale (APS) may no longer be able to secure financing for the property. This may be due to the recession and/or the purchaser's loss of employment between signing the APS and the closing date. The consequences of a failure to close on an APS were previously addressed in detail here.

Consequences of failure to close

In brief, the consequences for the purchaser who fails to close are as follows: the purchaser will likely forfeit their deposit; the purchaser may also be liable for the difference in value between the purchase price agreed upon in the APS and the re-sale price the vendor can obtain, less the amount of the forfeited deposit; the purchaser furthermore can bear liability for the vendor's costs until the re-sale, for example, gas, hydro, taxes, etc. as well as interest and other consequential losses the vendor suffered if the vendor was relying on the money from the purchase to buy another property.

Legal considerations

A change in the market conditions or loss of employment does not constitute a legally valid reason not to fulfill the obligations arising from the APS. Generally, there is no frustration of contract or force majeure at work.

Frustration

A contract is frustrated when a supervening event has occurred after entering into the contract, without the fault of either party, which renders the performance of the contract substantially different than the parties had bargained for ( Bang v. Sebastian, 2018 ONSC 6226). The event must have been unforeseeable. The courts have held that parties to an APS know that market prices can go up and down. While the magnitude of the downturn may have been unexpected, that does not render it unforeseen. It also does not alter completely the nature of the APS ( Paradise Homes North West Inc. v. Sidhu, 2019 ONSC 1600).

Force Majeure

In Paradise, the purchaser also argued the defence of force majeure. The court did not assess the merits of this defence. In fact, this defence is rarely litigated. One reason is that there is no common law doctrine of force majeure. This defence can only be brought forward if the contract explicitly provides for it. Such...