Part 3 - What Happens When A House Doesn't Close?

This is the 3rd installment in my series on What Happens When A House Doesn't Close - Part 1 detailed what happens when a Buyer breaches their contract & doesn't close & Part 2 is about how my Buyer clients benefitted from another Buyer's breached contract. Click through to catch up if you missed them! 

As I was researching & writing those first 2 posts in the series, I discovered that as the market was accelerating rapidly in 2020, 2021 & early 2022, some sellers were balking at closing because prices had risen so dramatically between the time that they sold their homes & when they were due to close...and they wanted in on that action - in other words, more money! None of my clients encountered that so it wasn't really on my radar screen...apparently it was happening back in 2017 as well, but again, not on my radar!

So what happens when a seller won't close?

It's a breach of contract, just like when a Buyer can't or won't close. And it's the Buyer's damages that are at issue now, the Buyer who needs to be made "whole".

First of all, the Buyer needs to be "ready, willing & able" to complete the transaction on the day of closing with their mortgage funds ready to go.

Secondly, and this is a tough one because it keeps the Buyer's deposit tied up, the Buyer must NOT sign a mutual release. A mutual release will release the Seller from liability & the Buyer won't be able to collect on their losses/damages from the Seller. (I go more in depth on deposits & mutual releases in Part 1 in case you need a refresher)

It should go without saying that the paperwork & processes/procedures followed should be perfect in every transaction, but especially in a situation like this, you better pray it is, because Sellers & their lawyer will be looking for loopholes to get out of the deal as unscathed as possible!

The real estate lawyer that the Buyer has engaged to close the sale may try a "demand to close" letter but if that doesn't work then it's time to bring in the big guns!

A Litigation Lawyer!

A litigation lawyer may also start out with a letter that spells out in great detail exactly what is going to happen and what it can cost the sellers. It can scare them into closing whereas a "demand to close" letter from a real estate lawyer might not have enough teeth.

If this doesn't work & assuming that the Buyer elects to proceed past this point...

The litigation lawyer can assess the situation & determine whether suing for "specific performance" is an appropriate course of action & then apply for a Certificate of Pending Litigation (CPL) & file that against the title to the property, in order to tie up the property so that it cannot be re-sold.

Specific Performance is an equitable remedy in the law of contract, whereby a court issues an order requiring a party to perform a specific act, such as to complete performance of the contract. Essentially the courts force the sale of the property.

The issue of "specific performance" will depend on the "uniqueness" of the property. This remedy may not be available for an ordinary subdivision home. There needs to be something unique about the property that can't be replicated.

If "specific performance" is off the table then it will be about covering the Buyer's losses & damages monetarily.

Some examples of this would be:

  • If the Buyer buys another house but had to pay more for it, then the Seller has to make up the difference & any additional costs involved in the purchase
  • If the Buyer already gave notice to their Landlord or already sold their existing home, the Seller will have to pay the costs associated with that too
  • Legal fees, moving, rent, storage of their belongings, really any & all (reasonable) costs incurred by the Buyers would be on the table when it comes to losses/damages

Now let's go back a few steps to the "demand to close" letter. And the letter didn't work. What if the Buyers don't have the time or resources for a fight & just want to move on with their lives & their deposit? Another option could be asking the Sellers to "buy out" the contract in exchange for releasing them from liability.

Here are some anecdotal stories from an online Legal Discussion Forum that I belong to:

Go to court you'll get the deposit back & much more. If the Seller wants to stay out of court make sure he pays back the deposit plus, oh I don't know, let's say $50k and then you'll sigh the mutual release

 Seller didn't want to close after deal went firm. Seller ended up paying the Buyer $$$ to get out of the deal.

And some additional stories from the same Forum where this tactic resulted in the Seller changing their mind & closing:

Had this once. Buyer's lawyer gave a buy out price + commissions to be paid by Seller in order to get out of the deal. Seller chose to sell

I had this happen to my Buyers a few years ago. The listing brokerage hand delivered an invoice for all of the commissions to the Seller since they had fulfilled their end of the contract. When the Seller saw that he was on the hook for the commission he finally agreed to close.

Most problems can be solved if enough money is thrown at it. They have a firm commitment to sell, they now have to decide if they can buy their way out of it. Commissions to both agents and the Buyer will need to be paid off. My guess is they will rethink once they realize what it will cost.

Before I wrap this up, I thought I'd share the case law that got me so interested in doing this last installment in the series:

Ahmad v Ashask - Specific Performance - Property sold for $865,000 on June 27, 2020...At the start of the lawsuite, in July 2021, the property was valued at $1,170,000

Dhatt v Beer - Specific Performance - Property sold for $800,000 in 2016 & was valued at more than $1.5M in 2021 when the sale was court ordered.

Cannon v Gerrits - Application for Certificate of Pending Litigation - Sellers trying to get out of the deal over a personal cheque vs certified cheque for the deposit.

I think it's important to note that scenarios like these usually happen in a rising market, not a falling or stagnant market...but as another colleague recently said "Sellers be crazy these days, prices are falling & it's causing irrational decision making".

This post came about because I was finding so many juicy stories & actual case law about nefarious doings by sellers when I was researching & writing the first 2 installments in the series...greed & deceit & large dollar judgements...Oh My! But sometimes bad things happen in life through no fault of anyone involved - think back to the situation in Part 2 where my clients were able to take advantage of a Buyer backing out of a purchase due to a medical diagnosis. It was a stroke of luck for my clients & they were so thrilled - not so much for that original Buyer who not only got a life altering medical diagnosis, but then got tangled up in a stressful legal situation & ultimately lost a big chunk of money too!

It also brought to mind something that happened years ago, when a co-worker of my husband's tragically passed away in a freak accident a week before he & his family were due to relocate to a new city for work. I remember hearing that the sale of his current home & the purchase of his new home in the new city were both "unwound" & the family stayed put. Such a simple word for what I'm sure was a complicated mess...because despite it being a very sad situation, it was still a breach of contract x 2 & there would have been significant financial consequences for his family at an already difficult time!

So there you have it, same topic from 3 different perspectives, all boiling down to the fact that contract law is serious business & trying to get out of a real estate transaction is messy, time consuming & expensive! Tread carefully & in good faith!

Until next time,

For some additional light reading on the topic (LOL!), check out these articles:

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