When a lawyer is standing in front of a judge clutching an emergency motion, the case rarely concerns a real estate deal gone wrong.
But Toronto-based lawyer Albert Frank recently raced to the courthouse to untangle a real estate twist he'd never before encountered in 30 years of practice.
Mr. Frank was representing a couple who sold their three-bedroom house in Markham, Ont. Three weeks before the closing date of Sept. 28, the buyer's lawyer let the sellers know his client did not plan to close the deal. She also wanted her $50,000 deposit back.
As the couple scrambled to find replacement buyers, the twist no one saw coming was that the first buyer's lawyer then registered a "caution against title" on the property.
Mr. Frank had never encountered such a tactic, but he knew that the replacement transaction – scheduled to close on Nov. 30 – was at risk.
He viewed the caution as an attempt to strong arm the sellers into agreeing to give up the deposit. "I thought it was pretty nervy. It was bizarre. It's not supposed to be used as a club to get your desposit back."
He urgently needed his motion heard by a judge in order to get the caution removed before the replacement buyers walked away. "The deal's going to die," he said at the time.
Mr. Frank won his legal argument. The case was settled and the defendant was on the hook for the sellers' costs in getting the caution removed.
The saga mirrors the turmoil in the Greater Toronto Area real estate market in 2017 and reveals some of the pitfalls in unwinding an agreement of purchase and sale. Mr. Frank says he met two other lawyers at the courthouse who had recently handled similar cases.
"I looked back about 100 years," into precedent-setting cases, he says. "I'd never heard of this concept."
His search turned up only one or two examples over that time, so he was surprised to hear the practice has become more common of late. He believes more cases could appear if the market goes through more volatility. "It's going to continue to happen as long as there are buyers out there who regret signing up to buy."
During an interview in his 48th-floor boardroom in Toronto's financial district, Mr. Frank said he hopes his legal win will educate other lawyers and their clients about the risks of attempting such a strategy.
"If you're bold enough to register a caution, you're likely to get into trouble if you're responsible for messing up a further deal."
Agreements were collapsing on a fairly regular basis in 2017 as some buyers bid outrageous amounts during the market's unharnessed run in the opening months of the year and then tried to renegotiate the price or walk away as the market suddenly came to a halt.
Shawn Lackie, a broker with Coldwell Banker-R.M.R. Real Estate in Durham region east of Toronto, says he has never encountered a situation in which one side registered a caution on title, but he does know of many cases of buyer's remorse over the spring and summer of last year.
Real estate agents on both sides typically warn that the scrap could end up in litigation and, not only could the buyer lose his or her deposit, the sellers may sue for the amount they lost if the second deal is at a lower price.
The sellers, meanwhile, are advised that, while they may ultimately win in court, the matter would likely drag on for months.
In Mr. Lackie's opinion, striking a compromise is the better way to go.
"If sanity prevails, the seller accepts an offer from the same buyer for less than originally agreed upon," he says. "Although it may have been far less than originally agreed upon, in many cases, the sum is still considerably more than their asking price and, in some cases, a lot more than they had any right to expect."
Mr. Lackie says that, a few months ago, he represented a spurned homeowner who held out for the original price for a time, but eventually relented.
"The seller was stressed out of his mind. In the end, he got more than he was expecting, but it was strenuous getting to that point."
Mr. Lackie says it's rare for a buyer to refuse to close altogether, but he did see cases after the "mad buying frenzy" of last year's first quarter. Most of the fallout came in the second and third quarters, he adds.
In the case of Mr. Frank's clients, they had listed their detached home in late May with an asking price of $798,000 and a description of the home's sleek kitchen, bamboo floors and new furnace. They hoped the eye-catching price would spark a bidding war, court documents show. When they didn't get the price they were hoping for, they relisted with an asking price of $998,000.
The court documents say it was around that time that the first buyer drove by the house and dialled the number of the listing agent from the for-sale sign. After taking a tour, the woman was willing to offer $990,000.
The real estate agent represented both the buyer and the seller in a practice known as "double-ending." Such dual agency is allowed as long as rules are followed, but Mr. Frank says the practice can get messy when there's a later disagreement. "It's awkward when the two sides end up duelling."
When the buyer informed the sellers through her lawyer that she didn't plan to complete the transaction, they launched a search for another buyer. They also beefed up the efforts of their local solicitor by calling in Mr. Frank.
The couple was successful in finding another buyer, he says, but, unfortunately, it was someone who was willing only to pay $870,000 – or $120,000 less than the first buyer.
The sellers made the sale conditional on the first deal not closing and indicated to the first buyer's lawyer that they were still willing to move ahead at the original price.
Her lawyer suggested his client might be willing to go ahead at a price up to $20,000 higher than the replacement deal.
"They were trying to settle it, but on terms that were unacceptable to the vendors," Mr. Frank says.
The first buyer's lawyer was demanding her deposit back and stated if this was not done, he would "need to register a certificate of pending litigation on title to the subject property" in order to preserve his client's right to the $50,000.
Mr. Frank countered that, since the client had repudiated the Agreement of Purchase and Sale and intended never to take title, the client clearly had no interest in the land. It would therefore be improper to register a certificate of pending litigation.
The measure is only intended to be used by people who claim an entitlement to the land, he explains.
The caution does not mean the replacement buyers would be unable to close, but that they would most likely be unwilling to go through with the transaction, unless they get clear title, Mr. Frank explains.
"Nobody in his right mind would do so because they would be taking title with this shadow over it."
Nevertheless, the caution was registered and the two sides could not reach a settlement before Mr. Frank appeared in a University Avenue courtroom and began arguing his motion before Justice Cavanagh of Ontario's Superior Court of Justice.
During a morning break, the two sides reached a settlement when the defendant agreed to withdraw the caution.
It was then up to the judge to decide costs. In his decision, Justice Cavanagh agreed with Mr. Frank's view that the caution never should have been registered in the first place.
The judge ordered the defendant to pay the jilted sellers' legal costs of $10,000.
The decision read, in part:
"I agree with the plaintiffs that, given that [the defendant] takes the position that the agreement of purchase and sale was not a valid and binding contract, and that she repudiated this agreement, there was no proper basis for the caution to be registered. It is clear that this was done to gain leverage to assist [the defendant] to resolve the dispute about the deposit in her favour. The caution was requested for an improper purpose."
The sellers were able to close the second deal and the house is now sold.
As for the collapse of the original contract, the legal wrangles continue. Mr. Frank is trying to collect the $120,000 shortfall that his clients had to accept when they signed the second agreement.
The buyer's lawyer is arguing that the real estate agent persuaded the client to make the offer and took advantage of a woman who did not have the capacity to sign the agreement. The real estate agent's actions amount to a "callous fleecing," according to documents in the case file.
Mr. Frank's position is that the buyer "wrongfully repudiated the transaction."
"The information presented to me suggests that this is not a case of anyone taking advantage of [the buyer] but rather of her agreeing to purchase in a hot market and then, when the market softened and she hit difficulties in selling her own property, her deciding that it was to her advantage not to close," Mr. Frank wrote in an e-mail to the buyer's lawyer.
For now, the $50,000 is held in trust by the original buyer's lawyer.
"I'm confident my clients, at the end of the day, will get that deposit," Mr. Frank says.
If the case doesn't settle in the meantime, he expects to stand in front of a judge again many months down the road.
"When property prices are going up, up, up, buyers are inclined to overlook a lot of things," Mr. Frank says, adding that some sellers, too, will look for excuses to back out of a deal when the market is rapidly rising.
He says the big "if" in the lawsuit surrounds whether the buyer was entitled to walk away from the deal.
"Our theory of the case is, [the homeowners] are trying to sell a property. By the time they were able to find a replacement buyer, the market sagged."
The takeaway lesson, he says: "Buyers should understand that they cannot use cautions to arm-twist sellers into releasing deposits. A buyer might have a valid reason to repudiate a deal; if so, the buyer could get the deposit back by proving this, but not by registering a caution."