In a recent post on market conditions affecting home sellers in BC’s residential real estate seeing far fewer transactions than expected. In addition, the possibility of deals collapsing was noted. One of the two critical impacts that can arise is the matter of “When is a Deposit a Deposit”. The other is whether a seller can sue for damages. The two options are not necessarily exclusive and that second one for home sellers is discussed in this post.
Real estate market trends indicate that “We are currently in a falling market. Prices have dropped precipitously in the Lower Mainland over the last 6 months – as much as 30% in some places (especially detached homes),” says Arsen Krekovic. Dramatic changes in the market that include a sharp rise in mortgage rates, falling prices, increased inventory of real estate properties and more, lead to issues in real estate transactions. Krekovic, an experienced real estate litigator with Vancouver law firm Hoogbruin & Company, helps find solutions when deals collapse.
Why deals collapse and what home sellers can do
Deals collapse for a variety of reasons. In today’s market, deals are collapsing because property values are falling and people have been caught on the wrong end of rising interest rates. So what should a seller do in a collapsing real estate deal? Essentially, there are two options available to the non-defaulting seller:
- Allow the contract to collapse and take the deposit; or
- Accept the repudiation/breach of the contract and sue for damages.
As noted in the companion post to this one, Options 1 and 2 are not necessarily exclusive.
Home sellers have the option to sue for damages
The seller can claim for any damages they have suffered as a result of the other party’s breach of contract. If the seller is also retaining the deposit, then they can claim damages in excess of the deposit amount. When calculating damages, the Court will try to put the party in the position it would have been had the breach not occurred. Often the main component of the damages will be the difference in the value of the property from the contract price.
In calculating the loss, the normal date for assessing the value of the property is the date when the breach of contract occurred. Notwithstanding the foregoing, where the date of the breach would be unjust, the courts have applied different dates to assess the loss of property value. The seller may sell the property at a lower price (as is the case in today’s falling market), and the buyer who failed to carry through will be found responsible for the seller’s loss. This was highlighted in a 2017 British Columbia Supreme Court case, Albrechtsen v Panaich, where the sale occurred after prices dropped due to the introduction of the 15 percent foreign buyer’s tax. There, the original agreement had been to purchase a house for $1,260,000, and the seller ultimately sold it for $910,000. Including expenses, the court held that the defendant was required to compensate the seller for total damages of $360,000. That required a payment of $300,000 in addition to a $60,000 deposit that the buyer had forfeited. In such situations, the seller is compensated for a variety of expenses, including the extra interest she may have to pay to carry more than one property.
Other components that may be considered by the Court when calculating damages will be the other losses and expenses that the seller has suffered and may include: closing costs incurred for the collapsed transaction, moving and storage costs, additional property or rental costs, interest and professional fees due or lost as a result of the breach. i.e., a realtor’s commission may be due and payable, despite failure to complete the transaction, and in such a case it can be included in damages.
No matter how the damages are calculated, when contemplating litigation, it must be remembered that a non-defaulting seller cannot rest on his right to sue in the hope of eventually making himself whole – he has a duty to mitigate or minimize his losses and may need to aggressively sell the property. If the Court finds that the seller hasn’t properly mitigated its losses, the seller may not be awarded full indemnification.
Obtain Proper Legal Advice
No matter the details of your specific situation, deciding what to do as a result of a collapsing transaction and navigating the Court process can be complicated.
The best way to make sure that you are properly protected when a deal collapses, is to engage a lawyer, at an early stage, who has experience dealing with these type of real estate matters.