An Overview of Failing to Close Residential Real Estate Transactions
In a problem-free real estate transaction, keys and funds are exchanged on the day of closing, and the transfer of title is registered. However, in some circumstances, either the seller or the purchaser cannot, or will not, complete the transaction as intended. This can happen for a variety of reasons, including when the purchaser does not have the funds to close, or when the seller is unable to provide clean title to the property.
Failing to close on time is actually a breach of contract of the standard OREA Agreement of Purchase and Sale. While the nature of the breach may vary, the general rule is that the innocent (non-breaching) party will be entitled to some form of compensation. For the seller, this might mean terminating the agreement and keeping the deposit. For the purchaser, this might mean suing for damages. Usually, small problems can be dealt with by the lawyers and realtors, and the transaction can proceed. However, there are some situations where the deal completely falls apart, and the courts get involved.
This article will explore some of the common breaches for purchase agreements and potential solutions associated with a failure to close
The simplest and least costly solution to a failure to close is an escrow closing. This can occur when all requisite conditions for closing have been met (i.e. transfer of funds, documents, keys, etc.) but there is not enough time to register the transfer. In situations like this, the parties can agree to close in escrow, where keys will be released to the purchaser, and funds will be released to the seller. Although there will be a transfer of possession of the property, the legal transfer of ownership will not occur until an agreed upon date (usually the next business day).
Delayed Closings and Extensions:
If it seems like one party will be unable to complete the transaction on the day of closing, that party might request an extension of the closing date. If accepted, this will amend the original agreement, and will relieve (at least temporarily) the obligation to close. Once a request is made, the other party will typically provide certain terms of extension, which can include their lawyer’s fee for an extension, paying the additional interest they will pay on their mortgage, charging inconvenience costs, or requiring an additional deposit.
There are certain situations where even though the innocent party wishes to close, it is impractical or improbable to extend the closing date. This can occur when a vendor or a purchaser gets “cold feet” and no longer wants to close.
If you find yourself in this situation but still wish to complete the transaction, you might need to sue for specific performance. Specific performance is an equitable remedy offered by the court, which requires the parties to complete the terms of the contract previously agreed upon. In the context of real estate, it would compel the parties to complete the agreement of purchase and sale.
A seller might elect to pursue specific performance in a down market, where property values have fallen since the agreement was entered into. Conversely, a purchaser might elect to pursue specific performance in an upturn market, where property values have increased since the agreement was entered into.
Accepting the Breach and Terminating the Agreement:
If the purchaser is unable to close, and the seller is unwilling to grant an extension, the seller might elect to accept the breach and terminate the Agreement and claim the deposit as damages. If the seller is unable to close, the purchaser might request a return of the deposit together with a set amount of damages for the breach. In situations like these, the realtors might urge the parties to sign a mutual release, and settle the matter before it proceeds to litigation. If the parties can agree at this point, the release will be signed and the listing brokerage will release the deposit.
If the parties can’t agree and sign the release, they are likely headed for litigation. The deposit will be a key issue for the parties, together with damages being claimed for the breach. Regardless of who breaches the agreement, both parties have a duty to mitigate their damages, and shouldn’t assume that all costs associated with the breach will be payable. For the seller, this might mean re-listing the property as soon as possible. For the purchaser, this might mean staying with family or friends and avoiding the hotel bills and purchasing a new house as soon as possible.
How Can We Help?
Prudent Law’s approach is to remain proactive throughout the purchase process and identify the warning signs when they occur. By tackling these issues before they develop into larger problems, our goal is to avoid significant costs and time delays. More importantly, we want to make sure that the deal closes.
Often, we can negotiate solutions that allow both parties to move on without the need for litigation. However, there are times when it becomes clear that the dispute is headed for the courts. At that point, we draw on our experience to guide our clients through the litigation process and advocate on their behalf to help secure their contractual rights.
For more information on this article, please contact Prudent Law at (905) 361-9789