One of the more common contract disputes I see in my practice is a failed real estate transaction. Typically, there are three reasons why a deal may collapse:
- Default or breach of contract,
- Misrepresentation, and
- Frustration.
Default
A default or breach of contract usually occurs when either the buyer or seller is unable to complete the conveyance, though occasionally it occurs when one party is unwilling to proceed. The typical scenarios include:
- the Seller cannot provide clear title, either because there are not sufficient funds to pay off an existing mortgage, or there is a charge that cannot be released (such as a certificate of pending litigation, or a claim of builders’ lien);
- the Buyer is unable to arrange financing to complete the purchase;
- either the Seller or Buyer does not want to complete due to changed economic circumstances (e.g., the purchase price does not reflect a rapidly rising or falling market).
Remedies for default or breach of contract can include retention of the deposit, an award of damages (i.e., the actual amount the non-defaulting party has lost due to the breach), and specific performance (i.e., a court order compelling the defaulting party to perform its obligations under the contract).
Most of these situations are resolved through a settlement involving the deposit. Rules governing the treatment of the deposit are found within most real estate contracts, and much ink has been spilled by BC Courts setting out the circumstances under which the deposits will be paid to an innocent party.
Misrepresentation
It is not unusual for a Buyer to be induced to enter an agreement based upon false statements made by the Seller or its agent. These false statements, or “misrepresentations”, may be innocent, negligent, or fraudulent in nature, and whether the Buyer is entitled to a remedy depends upon a number of factors, including the existence of contractual terms limiting the Seller’s liability.
A Buyer may be entitled to damages resulting from the misrepresentation, and in extreme circumstances may be entitled to rescission of the agreement (i.e., the agreement will be unwound, with both parties returned to their pre-contractual positions).
Frustrated Contracts
Cases in which courts have found a contract to be frustrated – incapable of performance – are rare. The following factors must all be proven in order to succeed:
- one or more of the parties is unable to carry out the contract;
- the event causing the inability to perform is beyond the defaulting party’s control; and
- the parties did not foresee the event or make any provision in their contract to deal with the consequences of the event.
General Considerations
Real estate contracts uniformly contain provisions for the timing of specified events, including the payment of a deposit (or increased deposit), the removal of conditions precedent to the transaction, the tender of conveyance documents, and the payment of sale proceeds. Most contracts stipulate that “time is of the essence”, meaning that any failure to meet a deadline would allow the other party to treat the contract as being in default. In that case, the innocent party has the option to consider the contract as being terminated, or may insist on the other party performing its remaining obligations.
The election of the innocent party has serious implications, and must be completed in a careful manner in order to make the correct decision and ensure all legal rights are preserved.
I have advised realtors, Sellers, and Buyers in both residential and commercial real estate deals where questions of enforcement and optional remedies have arisen. In such circumstances, the advice must be timely and legally correct, but as important, it must address the client’s commercial needs and interests. This is one area where the innocent party can unknowingly make a costly, irrevocable mistake, so it is always advisable to consult with experienced legal counsel before taking any steps.
This article is intended to provide general guidance on the subject matter. Specific advice should be obtained in connection with your particular circumstances.
