The housing market has been cooling from its pandemic highs and prices are declining. As a result, many buyers may get cold feet as their closing date approaches or their financial institution has reneged on the amount that it is willing to offer as a mortgage. Prior to signing an agreement of purchase and sale, it is important for every party to understand the terms of the agreement. If a buyer is unable to close, they may find themselves with unexpected consequences. In the recent case of Mouralian v. Grouleau 2022 ONSC 2925, the Ontario Superior Court considered whether a buyer who backed out of a transaction was nevertheless entitled to a return of their deposit.

The dispute arose from a failed real estate transaction in which the buyer was unable to obtain financing, and thus could not close. The seller was subsequently able to sell the property in question at a higher price, but retained the deposit. The buyer started a lawsuit for return of the deposit.

Generally speaking, if a buyer backs out of a transaction, the seller is entitled to keep the deposit. This is so even if the seller has not suffered any damages as the deposit is intended as a security mechanism to encourage the buyer to close. However, in certain circumstances, the court has the ability to order that there be no such penalty. This is called relief from forfeiture.

In determining whether relief from forfeiture should be granted, the Court looks at:

(1) whether the deposit was excessive in relation to the damages suffered; and,

(2) whether the seller keeping the deposit would be unfair.

Regarding part one of the test, the Court stated that the vendor sold the property for a greater price and therefore there were no damages suffered.

With respect to part two of the test, the Court stated that unfairness (called unconscionability) involves both unequal bargaining power (such as employer and employee) and an unfair deal. The buyer tried to argue that as a result of a death in the family around the time she signed the agreement of purchase and sale (“APS”), there was inequality of bargaining power. The buyer provided little evidence to support her stance of the effect of the death on her capacity to sign the APS. Ultimately, the Court stated that the APS was negotiated by two real estate agents and thus there was no inequality of bargaining power. The Court also decided that the deal was not unfair, particularly as the seller ultimately sold the property at a higher price. The Court thus declined to grant relief from forfeiture and the seller was entitled to retain the deposit.

Walker Law can assist you if you are looking for a real estate litigation lawyer or a commercial real estate litigation lawyer for a real estate dispute. Contact us today!

Please note that this article is intended for information purposes only. It is not intended to provide legal advice. If you have any specific questions, please contact a lawyer.

Tags: Civil Litigation Law, Commercial Litigation Law, Real Estate Dispute, Contract Disputes

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