Real Estate Disputes - What do do when your real estate transaction goes wrong

Real Estate Disputes

4 Common Lawsuits Buyers find themselves in 

The Small Claims Court can hear most civil matters for the payment of money for $35,000 or less in Ontario and 50,000 or less in Alberta. Among the most common types of claims heard by the court are those related to real estate transactions. With that being said, not all real estate disputes fit neatly together in one box. From a home buyer’s point-of-view they are multi-varied and can involve different parties under different scenarios.

Here are the four most common categories of lawsuits that buyers may find themselves in.

Closing gone wrong? Missing appliances/fixtures? Failure to disclose Defects? 

The Small Claims Court can hear most civil matters for the payment of money for $35,000 or less in Ontario and 50,000 or less in Alberta. Among the most common types of claims heard by the court are those related to real estate transactions. With that being said, not all real estate disputes fit neatly together in one box. From a home buyer’s point-of-view they are multi-varied and can involve different parties under different scenarios.

Here are the four most common categories of lawsuits that buyers may find themselves in.

1. DEPOSITS WHEN SALE DOES NOT COMPLETE

A deposit is an amount of money payable as the first installment on the purchase of something or as a pledge for a contract with the balance being payable later. They are almost universally required when entering into an Agreement of Purchase and Sale for a residential property. In fact, the standard Agreement of Purchase and Sale issued by the Ontario Real Estate Association (OREA) always provides for one although technically one could enter into such an agreement without a deposit. In any event, deposits of 5% or more of the purchase price of a home are not uncommon.

Unfortunately, not all real estate transactions close for one reason or another and the question then becomes what to do with the deposit. The answer to that question usually depends upon the circumstances surrounding why the transaction did not close in the first place. What follows are the three most common scenarios.

Conditional Sale and Conditions Not Met

A well-represented buyer will usually only make an offer to purchase a residential property that is conditional upon either financing or a satisfactory home inspection. (We note that in some highly competitive real estate markets bidding wars are such that buyers sometimes feel compelled to forgo such conditions – we are not dealing with that here).

When such conditions exist, a buyer is within their rights to cancel the agreement if the conditions are not met. For example, if a purchase is conditional upon financing and the buyer ultimately cannot obtain financing then the deal is cancelled and the deposit ought to be returned to the buyer without deduction. This, of course, is not the case when such conditions are waived as is often the case as an Agreement of Purchase and Sale progresses to completion.

If a seller retained the deposit the buyer would be within their rights to sue for its return.

Buyer Does Not Complete the Transaction

A very common scenario when a buyer does not complete the transaction is when they are unable to obtain financing and the condition for it was either waived or not incorporated into the Agreement of Purchase and Sale in the first place. In such a situation, the seller may be entitled to keep the full deposit even if they end up selling the property for more to another buyer. A strict interpretation of contract law generally, and the law of deposits specifically, could support such a position.

A more likely outcome, however, is that the court will look at the seller’s actually damages and deal with the deposit accordingly. For example, if a seller ends up selling the property for much more to another buyer and the increase in price exceeds the deposit the court may order the deposit back to the buyer. Part of the court’s authority to do this comes from section 98 of the Courts of Justice Act which states that “a court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just.” We further note that section 25 of the Act also allows the court to make orders that are considered “just and agreeable to good conscience.”

Even with the aforesaid sections in mind, a seller who takes reasonable steps to mitigate their damages would still likely be entitled to keep the entire deposit if a future drop in price and carrying costs equalled or exceeded the deposit.

Buyer Does Not Complete the Transaction

Although not very common, there are sometimes circumstances when a seller cannot complete the transaction either because they cannot meet certain conditions imposed upon them, they are unable to get financing for a purchase of their own, or they simply change their mind. In all of the scenarios a court would invariably side with a buyer for the return of a deposit.

2. FIXTURES AND CHATTELS

A fixture, as a legal concept, means any physical property that is permanently attached to a home. Examples include light fixtures, shelves, television mounts and taps and faucets. Property that is not affixed to a home is considered a chattel. Examples include washing machines, dryers, fridge and stove. Like deposits, the standard OREA Agreement of Purchase and Sale makes provision for these items. The two most common situations where they are involved in lawsuits are as follows:

Removal of Fixtures and Chattels

In some instances a seller make take fixtures and chattels with them when they move out even though they are specifically included in an Agreement of Purchase and Sale as being part of the transaction. In such situations, a buyer is well within their rights to sue for the value of the items taken.

Warranty as to Good Working Order

Another situation that can occur with fixtures and chattels is if they are delivered in good condition or good working order. Many Agreements of Purchase and Sale will include a schedule that states, among other things, that “the seller represents and warrants that the chattels and fixtures as included in this Agreement of Purchase and sale will be in good working order and free from all liens and encumbrances on completion.”

Where this becomes an issue the buyer is once again within their rights to sue for the repair costs, or in some cases the replacement value, associated with the chattel that is not in good working order. A buyer, however, must satisfy the court that the chattel was not in good working order on the date of completion and not a day later. This often becomes the focal point of dispute between the buyer and seller in such cases. For example, a fridge that was working while the seller was in position is alleged to be delivered broken on the day of closing. Each party is then put to the test as to whether it was indeed working or not on the day of closing.

3. FAILURE TO DISCLOSE PROPERTY DEFECTS 

There are two types of defects that can exist when buyer a house – patent defects or latent defects. A patent defect is one that can be reasonably discovered by inspection or ordinary vigilance on the part of the purchaser. For example, a cracked window that is plain to see would be a patent defect. With respect to patent defects the law of caveat emptor applies (Latin for buyer beware).

Latent defects, on the other hand, are those that cannot be reasonably discovered by inspection or ordinary vigilance. The law of latent defects can be complicated. If it can be shown that a seller was unaware of a defect or not willfully blind to it (e.g. mold behind a wall) then they may not be liable for it. However, if it is serious or deliberately concealed the seller may be liable for it.

4. BUYER REPRESENTATION AGREEMENTS 

Another common type of lawsuits that involve buyers don’t actually involve the sellers in a real estate transaction but rather the buyer’s real estate brokerage. Specifically, if a buyer has violated the terms of a Buyer Representation Agreement.

A Buyer Representation Agreement is a contract between a buyer and their real estate brokerage in which the buyer agrees to only purchase a certain type of property with the assistance of the brokerage for a certain period of time in a certain geographical region in exchange for a commission. For example, a buyer might contract for assistance in the purchase of a residential property for six months in the Greater Toronto Area for 2.5% sales commission.

If a buyer purchases a property without the assistance of the contracting brokerage during the term of the Buyer Representation Agreement then the buyer may be on the hook for the agreed upon commission. Given the price of houses in the Greater Toronto Area a 2.5% commission could easily be in excess of $25,000.

Notwithstanding that such a contract may exist, the court still has the ability look past it into the circumstances surrounding its signing. If, for example, the agreement was hurriedly signed among other paperwork while making an offer the court may find the contract is not enforceable. The court may also look at the sophistication of the buyer (level of education, proficiency in English, etc.) as well as whether or not the brokerage explained the agreement to the buyer. In signing situations adverse to the buyer the court may not uphold the agreement.

DO I NEED LEGAL REPRESENTATION?

In all of the above situations we have given just a very brief summary of the legal principles involved. Often the following factors can affect the actual success or failure of any given case:
1. The particulars of any signed contracts.
2. Any outside representations.
3. The particulars of the specific situation.
4. The case law as it applies to any given fact situation.
A legal representative with experience in such matters can often help you navigate the nuances of your specific situation.

Furthermore, knowing the legal principles as they apply to your case is only half the battle. There also remains knowing how to effectively litigate a case in the Ontario Small Claims Court. This can be quite a daunting task for the lay person who is unfamiliar with the Rules of the Small Claims Court specifically and the rules of advocacy generally. Consequently, if you are dealing with a case involving $3,500 or more you may wish to look into retaining a paralegal representative for some or all of your legal matter.

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