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Reneging on a home sales agreement can be costly

By Peter Ewanchuk

A residential home is very often the largest purchase a person or family will make. However, after the initial excitement of the search and making an offer, after signing the sale agreement, it is not uncommon for purchasers to worry they may not be able to afford the monthly payments and all of the associated costs with home ownership, and may ask to cancel the transaction.

Subject to any conditions, they will undoubtedly be told “a deal is a deal.” A signed formal purchase agreement is a binding contract and cannot be rescinded without the consent of the seller. And home sellers may be reluctant to accommodate cancellation requests for a variety of reasons – and perhaps especially so since recent data demonstrates that the Edmonton home market is currently in a partial downturn.

According to a news report, listings and sales are both down about 13 per cent from last year. That could be good news for those looking to purchase their first home, as they take advantage of a “buyer’s market.” The average price of a single-family detached home was about $494,000 at the end of the third quarter of the year, down about one to two per cent year over year.

By comparison, the average home price in Canada was about $655,500, the story adds.

While the lure of a lower price may attract purchasers, some buyers, and especially first-time buyers, can feel anxious after agreeing to a purchase and may try to back out after their deposit has been accepted.

No cooling-off period

In Alberta, there is not much leeway to cancel a real estate purchase. There is no “cooling-off” period for home purchases, which is unlike British Columbia, for example. At the start of 2023, B.C. amended its Property Law Act to allow for a three-day cooling-off period for buyers who have signed contracts of purchase and sale for residential property to allow parties some time to reflect on the situation and ensure they are prepared to complete the transaction.

In Alberta, walking away at or before closing after you sign a purchase agreement and conditions have been waived by you can have significant legal and financial consequences. People in such situations may have to forfeit their deposit, at a minimum, and deposits can usually between one to three per cent of the purchase price and also depending on various other factors such as competition for the same property.

Prospective purchasers could also be liable for other costs incurred by the seller, such as legal fees, mortgage carrying costs and any other losses the seller suffered.

For example, and in addition, once a buyer advises of their intention not to complete the transaction and the seller eventually sells their home – which could be for a lower price – the seller may sue for damages to recover the price difference.

Legal ways to back out

There are, however, some circumstances where a buyer could back out of a real estate transaction. One example is if the sale was conditional and the conditions imposed on the seller, or to be completed for the benefit of the buyer, were not met. This could include problems detected in the home inspection, with obtaining financing or the inability of the buyer to sell their current home. If the agreed-upon conditions are not met, the buyer can walk away from the deal and refuse to waive conditions.

Additionally, an agreement could be terminated if issues surface that are outside the contract’s conditions. For example, this can include if there is a lien on the home that was not disclosed or there was substantial damage to the property before closing.

Buyers who can prove that the seller knowingly misrepresented the quality or quantity of property may also be able to terminate a deal. This, however, can be cumbersome and costly, as the buyer will likely have to take the seller to court to prove the extent of the misrepresentation.

With misrepresentation, buyers have to prove the seller was deceptive or unreasonable in their failure to disclose an issue and that the buyer relied on the statements in the disclosure agreement when they decided to complete the purchase. There are critical differences between what are called “latent” defects and “patent” defects. A latent defect is defect that is not visible or easily discoverable by the buyer. A patent defect is one that is observable or could be discovered with reasonable due diligence by the buyer.

Sellers sometimes want out of deals

After the Residential Purchase Agreement has been signed, some sellers may also have second thoughts. Perhaps they change their minds and decide they want to keep living in the home, or a situation requiring them to relocate has changed, or they feel they have agreed to a price far below the property’s value based upon further interest or back-up offers.

For a seller to back out of the contract they may likely have to assume significant legal and financial consequences. A seller can also be sued for breach of contract by the buyer. This may result in the court ordering the seller to complete the sale – called specific performance – or the buyer may file a purchaser’s caveat or a certificate of lis pendens being put against the house and seek considerable damages resulting from the seller’s breach.

A certificate of lis pendens is an official notice to the public that a lawsuit involving a claim on a property has been filed and any future property buyer may be subject to, or made a party, to any litigation pertaining to the property, making it extremely difficult to sell the home in the future. The original seller will also remain liable for damages which may result to both.

The seller will also need to immediately return to the buyer the deposit amount and any of the expenses they have incurred, with interest. Expenses can include the cost of inspections and appraisals or any other reasonable charges incurred.

In addition, the real estate agents may take legal action against the seller to recover their lost commission and any reasonable and agreed-upon costs of marketing the property.

Sellers can legally back out of the sale if the buyer fails to meet the conditions set out in the contract related to deadlines or financing. If that failure is the buyer’s fault once the conditions are waived, then the seller may be able to retain the deposit.

A real estate lawyer can cut the risks

To reduce the likelihood of either side in a purchase agreement wanting out, both parties should consult a real estate lawyer before signing. That will ensure that the proper contingency or condition clauses are in place to protect both parties’ interests, as well as other legal issues that most people may not be aware of. Having proper conditions in place to protect you is key, and either party may seek to have them added to the contract. Once conditions are imposed, they are for the strict benefit of the party imposing them, and only that party can waive or refuse to waive the condition.

Keep in mind that real estate law can be intricate and having a lawyer with specialized knowledge in this area can help ensure that all legal aspects of the transaction are handled properly. Every property transaction involves numerous legal documents, which a real estate lawyer can review to ensure that your rights and interests are protected.

A real estate lawyer can conduct a title search, verifying that the property has a clear title, free from liens or other encumbrances. They can also help clients navigate zoning and land use regulations to ensure that the property is suitable for the intended purposes. It is critical for a buyer to ensure that they have received and reviewed a copy of title prior to making an offer as there may be vital information such as caveats, rights of way, or restrictive covenants that may significantly influence their use of the property or plans for future development.

You may also want to engage with other professionals such as a professional who can conduct a review of condominium documents to advise about such things as special assessments or the financial “health” of the condo corporation.

Contact us for assistance

No doubt, both buyers and sellers could have valid reasons for wanting to terminate a purchase agreement once it has been signed, and conditions waived. You need to be aware that there may be legal consequences if that happens, so talk to a member of the Demas Schaefer team to discuss your options.

We have represented clients throughout the province in Edmonton, Leduc, Wetaskiwin, Sherwood Park, Spruce Grove, St. Albert, Red Deer, Airdrie, Calgary, Lethbridge, High River, Fort McMurray, St. Paul, Smoky Lake, Provost, Grande Prairie, Peace River, Slave Lake, Edson, Hinton and Cold Lake. We appear both in person and remotely to accommodate all of your needs.

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