Home buyers who make unconditional offers had better be ready to follow through, even when unforeseen events such as Ontario’s foreign-buyers tax cause the market to drop, a court has ruled.
One buyer who withdrew just after the Greater Toronto Area’s hot real estate market suddenly cooled in the spring of 2017, after the tax was announced, has been ordered to pay more than $600,000 – the difference between the price she agreed to pay, and the much lower price the seller ultimately received from someone else.
The buyer, Shahla Sheikhtavi, argued the legal “doctrine of frustration” – an unforeseen event that caused a drastic change in circumstances, and relieved her of her contractual obligation. Either that, she said, or there was an “implied condition” in her unconditional offer that she needed to sell her own home and obtain mortgage financing first.
But the Ontario Court of Appeal said the doctrine does not apply to real estate buyers who take risks in bidding wars, only to be disappointed in how things turn out. In a 3-0 ruling on Tuesday, the court said that while the market drop was unforeseen, the buyer freely chose not to make the purchase conditional on being able to sell her home or obtain financing.
And she made that choice, said the court, “because she wanted her offer to be accepted,” even though she wasn’t the highest bidder. As for the implied conditions, the written agreement contained a clause precluding any such thing, the court said.
In April, 2017, Ms. Sheikhtavi offered $1,871,000, with a deposit of $80,000, for a home owned by Richard and Sylvia Perkins in East Gwillimbury. It was not the highest offer, but it was the highest one that contained no conditions. In all, the Perkinses received 13 offers, and they accepted Ms. Sheikhtavi’s.
But soon after, the Ontario government introduced the Fair Housing Plan, which included a 15-per-cent tax on non-resident purchasers, and other measures. The market dropped by 20 to 30 per cent in the area where the Perkinses lived, according to affidavits from two real estate agents, presented in court by Ms. Sheikhtavi’s lawyer. Ms. Sheikhtavi did not close the deal as arranged on July 10. The Perkinses then put their home back on the market, and when it sold for $1,251,888, they sued Ms. Sheikhtavi for the amount they were out – $619,112, plus $4,621.05 for the mortgage costs they continued to carry during the intervening period.
This past March, a lower-court judge ordered Ms. Sheikhtavi to pay those costs, and the appeal court upheld that ruling on Tuesday, while also ordering her to pay an additional $15,000 toward the sellers’ legal costs.
Neither Ms. Sheikhtavi nor her lawyer, Brian Sherman, could be reached for comment on Tuesday. But in a legal filing, they argued they had conducted themselves as everyone did.
“In this ‘hot’ market, it was the practice of the day for buyers to purchase a home before preparing and listing their homes for sale. The buyers had to act fast as each listed home would receive several offers and would be purchased almost instantly. Also, most sellers, due to the volume of offers, would only accept offers without the conditional inspection and financing clauses.”
André Kutyan, a Toronto real estate agent who had no connection to the case, said that buyers walking away from deals typically say, “Keep my deposit but don’t sue me for anything more” – a risky approach, he said. What buyers should know is that “you’re signing in blood. You could be on the hook for a lot more than your deposit.”
Lawyer Dylan O’Leary, who represented the sellers in the case at the appeal court, said the message of the ruling is that unconditional agreements mean just what they say – no conditions. “Courts are increasingly unwilling to read in conditions. Property values are changing every day and if you don’t have the ability to finance a sale, I think you need to be much more cautious."