How Can Developers Protect Against Defaulting Buyers? Mitigation Strategies In Today's Market

Robins Appleby LLP


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Developers of residential buildings, whether condominium or low-rise "freehold" homes, have faced significantly increased numbers of purchasers not closing their deals...
Canada Real Estate and Construction
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Developers of residential buildings, whether condominium or low-rise "freehold" homes, have faced significantly increased numbers of purchasers not closing their deals due to the inability to obtain financing, even where significant deposits have been paid to the developer. This is particularly the case for homes sold at high prices at peak market (particularly in late 2021 and early 2022).

We are not seeing as many defaults on high-rise condominiums due to the longer build period. High-rise condos closing today were likely sold 4 to 5 years ago when the market was not at a peak, whereas high-rise condos launched at peak will likely not close until 2025/2026 or later, at which time the market and prices are expected to have rebounded.

Mitigation strategies

As we work through the various deals in which purchasers are unable to secure sufficient financing as a result of low appraisals, there are a number of strategies for developers to mitigate the risk of purchasers defaulting.

Most purchase agreements allow developers to require proof of purchaser financing: the purchaser has either available cash or a mortgage pre-approval for the sale price, failing which, the vendor can terminate the deal. Developers should obtain this information when accepting agreements, and request periodic updates to ensure the purchaser's financials have not changed.

As closing dates approach, obtaining pre-approvals with a long enough rate hold (if possible) reduces last-minute surprises where a purchaser is unable to secure financing. Many purchasers themselves will not realize they cannot obtain financing until it is too late to find alternate arrangements.

Similarly, educating purchasers about closing expectations is an important mitigation strategy. Purchasers frequently do not take into consideration the extent of adjustment costs on closing and/or whether they are eligible for the HST Rebate (which, if not eligible, that amount is added to the sale price). Although it is the responsibility of the purchasers and their lawyers to understand these items, developers can help avoid last-minute surprises by emphasizing these items early on.

Even where the above strategies are deployed, purchasers may not be able to come up with adequate funds to close on the closing date. In that case, many developers have been working in good faith with purchasers to keep the deal alive, most often, by permitting extensions to the closing dates in order to give purchasers time to come up with the shortfall of funds.

Developers may also allow assignments in these cases, provided they are not in competition with their own inventory units. These assignments are difficult when sufficient financing is unavailable for the sale price or if other homes in the project are lower in price; however, purchasers may be able to assign at less of a loss than their loss on a default.

Developers' remedies on a purchaser default

It should go without saying that purchasers have no right to demand a price abatement or any change to the terms of the purchase agreement. In this author's opinion, purchasers would not expect to pay more for the property if market prices increase; likewise, it is unreasonable to expect developers to accept less than the agreed upon price as a result of sale prices decreasing.

A recent Ontario Superior Court case dealt with a failed real estate transaction from early 2022. In the case of Zoleta v. Singh and RE/MAX Twin City Realty, 2023 ONSC 5898, the purchaser received an appraisal for a lower value of the property than agreed upon in the purchase agreement, and advised the vendor that the purchaser "require[d]" an abatement for the difference in value. The vendor did not agree, and ultimately the purchaser failed to close on the closing date.

In this case, the purchaser asserted bad faith on the part of the vendor. The Court found that the vendor did not act in bad faith, nor had an obligation to agree to change the terms of the agreement. The Court instead re-iterated that a party to a real estate transaction may, in the absence of any bad faith, insist on strict compliance with the agreed upon terms of the contract. The Court also found that the purchaser unequivocally communicated its intention not to complete the transactions in accordance with its terms by its lawyer stating that it "required" an abatement to close the transaction, which amounted to a repudiation of the contract.

Where a purchase agreement is terminated as a result of a purchaser's breach, the vendor is normally entitled to keep the purchaser's deposit, which is credited towards any damages suffered by the vendor as a result of the breach.

The seller is entitled to damages for the difference between the purchase agreement sale price and the re-sale sale price, plus any reasonable additional costs incurred to re-sell the home (less the amount of the purchaser's forfeited deposit). Other costs may be additional legal, realtor, or other professional fees incurred, and interest, realty taxes, and other costs associated with the purchaser's breach.

At the end of the day, purchaser defaults are happening and will continue to happen. However, developers are well within their rights not to agree to an abatement of the purchase price, even in a volatile real estate market; and purchasers will be held responsible if they do not comply with the deals they made.

Originally Published by CondoBusiness

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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