Home sellers in BC’s residential real estate are seeing far fewer transactions than expected in this often enviably dynamic market. Even near year’s end, motivated buyers have typically still looked to purchase their dream homes. Yet, times have changed. Today’s post covers how deals can collapse. Let’s first look briefly at changes in real estate sales amidst the desire for real estate ownership.
How BC’s current real estate market downward trend can affect you
“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 with detached homes,” says Arsen Krekovic, an experienced real estate litigator with Vancouver law firm Hoogbruin & Company.
“The trend has been compounded and/or partially caused by the uptick in interest rates. This has led to buyers backing out of real estate deals – commonly referred to as breached contracts of purchase and sale.”
The BC Real Estate Association (BCREA) has reported that by this year’s end the real estate market may be down more than 34 percent.
What’s contributing to the BC Real Estate Market Situation?
- The rise of mortgage rates was much faster than expected
- Mortgage rates have also risen to a higher level than anticipated
- The drop in sales is predicted to go yet five per cent lower in the upcoming year, due in part to the shift in borrowing costs that will likely impact housing market activity and bring it below previous levels.
- The Central Bank, maintains that in many ways, we could have anticipated the housing market pulling back as the growth in home prices seen over the pandemic “unsustainable.”
And the BCREA has stated that lower sales resulting in more inventory in the real estate market has nudged some regions, especially expensive areas, into a buyers’ market territory.
Why deals collapse and what actions can non-defaulting sellers take
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.
Options 1 and 2 are not necessarily exclusive and in this post we look closely at deposits
When is a Deposit a Deposit?
Traditionally, earnest money paid prior to the completion of the contract (customarily 5 % of the contract price) has usually been considered to be a “true deposit” which, according to the usual Real Estate Board standard form of Contract of Purchase and Sale, should be automatically forfeited to the seller after the buyer’s breach of the contract, without the seller having to prove actual damages. However, defaulting purchasers will sometimes refuse to allow the brokerage to release the deposit to the seller as a bargaining tactic when it comes to the seller’s claim in damages (see our post on this here).
However, not all money paid prior to completion is considered a deposit. Sometime the wording in the Contract of Purchase and Sale is such that the deposit is not a “true deposit”. That is why reviewing the terms of a Contract with a real estate lawyer is especially important if the wording of the deposit clause is not standard form. At other times, the deposit is so large as to be deemed a penalty or not a true deposit.
Depending on the wording of the contract a party may be able the claim the deposit and claim damages that exceed the deposit. However, where the wording of the contract provides that the deposit is liquidated damages, a seller will be prohibited from seeking additional damages. As a result, it is common for contracts to provide that the deposit will be absolutely forfeited to the seller and the seller may claim any additional damages.
If the buyer and seller end up going to court over the deposit, a Court could characterize the deposit clause as a: true deposit clause; which is enforceable; a penalty clause, which is not valid; a clause describing an excess deposit, which may not survive the Court’s review; or anything in between. In other words, just because it is called a “deposit” in the Contract that does not mean that it is a “true deposit” which can be automatically claimed by the seller if the buyer defaults.
You will need legal advice from a lawyer experienced in collapsing real estate transactions to help you determine if it is a “true deposit”. The real estate litigation counsel at Hoogbruin & Company is a reliable and experienced source to reach out to.