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Jan 24, 2020

‘Going All In’ – The risk of buying a new home before selling your current home



January 23, 2020 | renx.ca

The November 26, 2019 Ontario Court of Appeal decision in Perkins v Sheikhtavi illustrates the risk that arises for a buyer who unconditionally buys a home before selling his/her current home.

The Facts:

Ms. Sheikhtavi (the “Buyer“) unconditionally offered $1,871,000 to purchase the Perkins’ (the “Sellers“) home. The Sellers accepted the Buyer’s offer.

In April 2017, after acceptance but before closing, the Ontario government made a policy announcement (15% non-resident speculation tax in Toronto and surrounding areas) that resulted in a 20% to 30% drop in real estate prices in the area.

On closing, the Buyer advised the Sellers that she could not close because she had not sold her home and could not obtain bridge financing.

The Sellers re-listed their home and sold it to a third-party for approximately $620,000.00 less than what the Buyer originally agreed to pay.

The Sellers sued the Buyer for the $620,000 shortfall plus carrying costs of the home from the original closing date to the closing date with the new buyer.

The Buyer sought return of her deposit by arguing that the government’s policy announcement “frustrated” her agreement with the Sellers.

The motion judge found for the Sellers. The Buyer appealed.

Issue:

Did the government’s policy announcement “frustrate” the contract thereby releasing the parties from their respective obligations to each other?

The Decision:

The appeal was denied. The Buyer was ordered to pay the shortfall plus the carrying costs sought by the Sellers.

The Rationale:

  1. “Frustration” is a doctrine that applies to contracts, “when a supervening event alters the nature of [one party’s] obligation to contract with [another] to such an extent that to compel performance despite the new and changed circumstances would be to order the [first party] to do something radically different from what the parties agreed to under their contract.”
  2. Frustration will not apply if the supervening event “was contemplated by the parties at the time of contracting and was provided for or deliberately chosen not to be provided for in the contract.”
  3. A party claiming that a contract has been frustrated has the onus of proving the constituent elements necessary to establish frustration.”
  4. The Buyer’s agent told the Buyer that a conditional offer would not be accepted so she made her offer unconditional on the sale of her home and financing even though “there was a risk her home would not sell at the price she sought“.
  5. While the policy announcement was an “unforeseen event”, it did not “force [the Buyer] to do something radically different from what the parties agreed.”
  6. The Buyer decidedly “took a risk” because she wanted her offer to be accepted.

The Lessons:

  1. In a rising market there are strong inclinations to put in an unconditional offer to avoid bidding wars. However, such offers come with the risk that an unforeseen event can arise (causing a fall in the market) when you go to sell your home. Ask yourself: “am I willing to take that risk?”.
  2. If you decide that you are willing to take the risk of making an unconditional offer, consider mitigating the risk by: conducting your property inspection and title search; obtaining financing approval before you make the offer and negotiating for a longer period to closing with the right to accelerate the closing date if you find a buyer for your home.
  3. If you are a seller, consider putting your home on the market with a requirement that that any offer will be conditional on your purchasing a home within a fixed period. That way if you don’t purchase a home before expiry of the conditional period, you are not bound to sell yours to your buyer.

Thank you to Thomas Witteveen, articling student, for assisting in the finalization of this article.


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