Can the pandemic get you out of an Agreement of Purchase and Sale?
In one of our previous blog posts, we discussed the importance of an Agreement of Purchase and Sale (“APS”) and how it constitutes a binding contract between a Buyer and a Seller in any real estate transaction. Entering into an APS is meant to reduce uncertainties around closing - however with the COVID-19 pandemic, and its associated business closures and other effect - it has created increased uncertainties around closing the transaction. Normally in an APS, you would include specific conditions that need to be satisfied in order to move forward with a transaction - one common example would be a financing condition for the buyer. However, more generally could a buyer use the COVID-19 pandemic as an excuse to get out of its contractual obligations?
Force Majeure clause and the Doctrine of Frustration
The two most common clauses or legal doctrines that a Buyer might rely on to get out of an APS are the force majeure clause and the legal doctrine of frustration. A force majeure clause is a contractual provision that states that in the event of an unforeseeable circumstance that would prevent parties from fulfilling their obligations, both parties are released from specified obligations in the contract. This type of a provision is also sometimes referred to as an “Act of God” clause. In our past blog post, we discussed the attitude of Ontario courts to commercial tenants using a force majeure clause in their lease to escape paying rent during the pandemic, and the same principle applies here.
For a force majeure clause to absolve a Buyer of liability, the contract must expressly include such a force majeure clause and the circumstance must be one that is impossible to anticipate. In Ontario, most Sellers or real estate agents use the Ontario Real Estate Association’s (“OREA”) standard agreement forms, which form does not provide for a force majeure clause. So, as said earlier, the contract must expressly provide for the force majeure clause. An important point to note is that even if this clause is provided for in the contract, the Buyer must show that the pandemic has made it impossible for him or her to fulfill their obligations. This is a very heavy requirement to meet.
Buyers may also want to rely on the doctrine of frustration. As discussed previously, the doctrine of frustration is an equitable legal doctrine that will excuse one or both parties to a contract from its performance in certain conditions, when performance of the contract becomes legally or physically impossible, without the fault of either party. Generally, courts have held that parties to an APS are aware of fluctuating market prices and as such, Buyers are not likely going to be permitted to use the pandemic as an excuse to get out of their obligations in the APS if they have waived any of their express conditions or didn't include any conditions at all to closing (other than those narrow exceptions generally included in the APS).
Consequences of Failure to Close an APS
The first consequence of being unable to close an APS is that the Buyer loses the deposit paid. While this may seem like a relatively small price to pay, losing the deposit is not the only consequence. Where the Seller is finally able to resell the property, if it is at a lower price, the Buyer can be sued for the loss in value of the property on such a resale.
In the case of Bang v. Sebastian, 2018 ONSC 6226, the Buyer was unable to close its purchase and as a result, was liable for over $120,000 in damages for the lower resale price, and other charges.
Another interesting case on this point is Gamoff v. Hu , 2018 ONSC 2172 , where the court ordered a couple in Ontario to pay $470,000 for backing out on a home purchase deal which represented the difference between the agreed upon purchase price and the subsequent purchase price.
In the more recent case of FSC (annex) Limited Partnership v. Adi 64 Prince Arthur L.P., 2020 ONSC 5055, though not an APS case, the respondent’s argument that financing difficulties caused by the COVID-19 pandemic would frustrate its obligation to purchase the applicant’s interest under the contract could not be sustained.
How can Buyers reduce their risks?
Now that we know the pandemic itself will likely not permit a buyer, except in truly extraordinary circumstances or unless specifically contemplated by a clause in the APS, to get out of its obligations under the APS, how then can Buyers reduce their risks? We will discuss certain steps Buyers can take below:
Buyers can ensure specific clauses are put in the APS to make the purchase of a property conditional on getting adequate financing.
Buyer can also make sure the terms in the APS protect them in unexpected circumstances.
Finally, and this is in fact the most important step, Buyers should consult with their lawyers before concluding any APS so that their interests are adequately protected.
At Northview Law, we would love to discuss any questions you have about protecting your interests in any real estate transaction. You can book a free consultation with Northview Law on this link, or contact us at 416-639-7639. We look forward to hearing from you soon.