Canada: Couple Caught In Bidding War Frenzy Reneges On Purchase Of Dream Home, Liable For Damages

Case Comment: Gamoff v Hu

Much ink has been spilled analyzing and assessing the macro impacts of the residential real estate market worldwide. Canada and its largest cities are no exception, particularly in Vancouver, Toronto and the surrounding areas. When the residential real estate market rises, many people, perhaps with the exception of first-time buyers, are joyful homeowners and investors. When the market turns and drops, it is not for the faint of heart.

In Gamoff v. Hu, 2018 ONSC 2172, Justice Edwards presided over the sad facts of how one family, desperate for their dream home, became embroiled in a bidding war and overextended their ability to finance the purchase price of that home. Regrettably, the tragic facts of this case are not uncommon.

The Facts

The Plaintiffs, looking to take advantage of the "hot market", listed their home with Re/Max All-Stars Realty Inc. (Re/Max) for $2,000,000. Re/Max listed the property on March 29, 2017. The property gained a lot of attention and interest, generating 18 showings and three offers to purchase within a very brief period of time (March 29, 2017, to April 2, 2017).

The Defendants presented an offer to purchase on April 1, 2017, for $50,000 over asking but were advised on the following day that their offer was too low given the multiple offers received. Despite having told their realtor that they did not want to become involved in a bidding war, their dream home was only a signature away; the Defendants ultimately submitted an offer for $2,250,000 which was accepted by the Plaintiffs.

Unfortunately, the Defendants subsequently learned that, through a combination of their approved mortgage financing and assessed value of their home, they would not be able to obtain the necessary financing to close on the Agreement of Purchase and Sale. As a result, the Defendants' lawyer put the Plaintiffs on notice that the transaction would not close and urged them to relist the property to mitigate the damages:

We are putting your clients on further notice to take immediate steps to start mitigating their losses by (a) immediately contacting any buyers who made offers on April 1, 2017 to determine whether they may be willing to purchase the property; and (b) re-listing the property on the market/MLS as soon as possible in order to find a suitable buyer. We trust your clients will make best efforts to sell the property for the highest price possible in order to satisfy their duty to mitigate.

The Plaintiffs obliged, and relisted the property at the price originally agreed to by the parties, $2,250,000, but received no hits – the real estate market in the Greater Toronto Area appeared to have cooled...The Plaintiffs, on the advice of their realtor, subsequently reduced the listing price to $1,998,000, and then lowered it again to $1,798,000.

In July 2017, the Plaintiffs finally received an offer to purchase the property for $1,700,000. After some negotiation, on August 9, 2017, the Plaintiffs entered into a new agreement of purchase and sale with an arms-length purchaser in the amount of 1,770,000. This transaction closed on October 3, 2017, almost $500,000 below the original offer and acceptance of $2,250,000.

The Plaintiffs sought summary judgment for the difference between the agreed-upon purchase price and the final sale price.

Summary Judgement Motion

The motion judge found that the agreement of purchase and sale was repudiated by the Defendants and that the Plaintiffs acted reasonably in their efforts to mitigate their damages. The Plaintiffs were entitled to damages based on the difference between the contracted for sale price between the parties and the ultimate sale price of $1,770,000. The Plaintiffs were also entitled to the special damages claimed to relist and resell the property.

As Justice Edwards noted, the impact of this decision will undoubtedly have a dramatic effect on the Defendants. He sympathized with the Defendants and those in similar situations, noting that "with the changes in the real estate marketplace in the Greater Toronto Area, I have every expectation that there may be more cases where purchasers find that they have overextended themselves in a declining market."1

Justice Edwards ended his decision by providing the following advice:

Purchasers would be well advised to consider making their offers to purchase contingent on financing, and for the sale of their existing home if they have one.

A Word to Prospective Buyers

While realtors may argue that by including the above-noted conditions renders an offer unattractive compared to others, doing so protects against the downside risk of having to back out of an agreement of purchase and sale due to a failure to obtain funds or sell.

This family's dream turned into a horrific nightmare and is a reminder that purchasers should obtain, not only real estate advice, but legal and financial advice as well in order to manage their risk when getting on the roller coaster ride of the residential real estate market.

Read the full decision.

Footnote

1 Gamoff v Hu, 2018 ONSC 2172 at 41.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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