What Happens If a Property You Bought is Damaged Before Closing?

An agreement for purchase and sale of a property is a contract between two parties, which is a buyer and a seller. Both parties are obligated to take reasonable steps to ensure that the agreement of purchase and sale is closed and the sale occurs. It is not always clear what steps the parties should take when intervening events cause damage to the property between the date that the agreement of purchase and sale is signed and the date that the sale is expected to close.

Agreements for purchase and sale of real properties in Ontario are usually drafted on standard forms prepared for by the Ontario Real Estate Association (“OREA”). The OREA forms have existed for quite some time and are intended to avoid property disputes that may result in civil litigation. The standard OREA purchase form provides that the seller is responsible for the property up until the sale is completed. If there is substantial damage to the property, the buyer can terminate the agreement of purchase and sale and have all of the funds previously paid in the form of a deposit, returned to them. While this portion of the standard agreements of purchase and sale seem to balance the interest of the buyer and the seller, it is not always clear what kind of damage is substantial enough to permit the buyer to terminate the agreement of purchase and sale.

A recent case from the Ontario Superior Court of Justice, Tsui v Zhuoqi 2021 ONSC 5421 shed some light on what constitutes substantial damage that permits a buyer to terminate an agreement of purchase and sale and what both parties should do when they discover damage to the property.

In this case, the parties entered into an agreement of purchase and sale to buy a three-storey condominium unit. The seller was to repair the plumbing system and while doing so, the seller’s contractor caused a leak which resulted in water damage to the floors, subfloor, basements, trim, ceiling and drywall. The buyer and seller disagreed significantly about the cost to rectify the damage. The buyer was concerned that the damage could be substantial and the cost to repair it would be significant. The seller believed the damage was minor and could be repaired for a modest sum. The cost to repair the damage ended up lower than both parties anticipated; but neither party’s engineer could assess the damage without destructive testing, that is, there could be hidden defects or damages.

The court determined that when damage occurs, the agreement of purchase and sale implies that the buyer ought to have an opportunity to inspect the property to determine if the right to terminate the agreement of purchase and sale arises. That is, the buyer has the right to determine if the damage is substantial damage. Further, the court stated it is not solely the cost of rectifying the damage that determines if it is substantial. The quality character and consequences of the damage must also be assessed.

Unfortunately, the court did not delineate a bright line rule for what constitutes substantial damage. However, what is clear is that when damage occurs, the parties must co-operate with each other so that they are both able to understand and assess the extent of damages. After damages are assessed, parties may find it more economically feasible to work together to negotiate a resolution that closes the agreement of purchase and sale, even if that requires further negotiation or an abatement in the purchase price.

If you are looking for a real estate litigation lawyer or a lawyer for contract dispute, Walker Law can assist you. 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.

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