Failed Agreements of Purchase and Sale

July 27, 2021

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An Agreement of Purchase and Sale (“Agreement”) may not be completed for a number of reasons, including unsatisfied conditions relating to matters such as financing, rezoning approval, a home inspection or the sale of a buyer’s current home. This failure to satisfy a condition may raise an issue about the return of the deposit held in a brokerage’s real estate trust account.

The Buyer would sign and deliver waivers once the conditions are fulfilled. Time is of the essence; Buyers risk termination of the agreement if the waiver is not delivered as per offer deadlines and conditions. Complicating the issue further, in multiple representation situations, the brokerage is not authorized to act as agent to give an receive notices to either party. The Agreement of Purchase and Sale must include instructions (how to convey, specific person and specific address) as to how waivers need to be delivered.

The wording of a condition clause in an Agreement, for example, “This offer is conditional upon the buyer obtaining satisfactory financing within five banking days, failing which the deposit shall be returned to the buyer in full without deduction” may appear to be clear in terms of the return of the deposit if the condition isn’t waived.

However, in some cases the courts, in reviewing a condition clause in an Agreement, have imposed obligations on the party who is to satisfy the condition (seek financing, have an inspection done, etc.). For this reason, a party to the Agreement (Seller) may dispute the return of the deposit (no evidence the Buyer contacted a financial lender, no evidence of having an inspection done, etc.) and the issue of entitlement to the deposit may have to be resolved by the courts.

How and why the agreement often fails

There are many reasons for a Purchase and Sale Agreement can fail, but there are things to remember for both a buyer and seller. An important factor regards the deposit for the specified property. If the seller of the property does not close the deal, they are not entitled to the buyer’s deposit. There is no direct entitlement to the deposit for the property. Furthermore, there are potential damages that could be considered in the event where the transaction fails as well.

For purchasers, specifically in commercial leasing, specific performance is in place to ensure that they are protected. Specific performance is a court order to enforce the leasing party to execute their end of a contract. With such an agreement, there are special circumstances that surround specific performance. These circumstances ensure the purchaser is granted special relief if the vendor is to back out.

Legal matters can also be grounds for the agreement to fail. Legal grounds to not close on the agreement can include misrepresentation of the property. This can include prior land use, future land use or what is included with the sale of the property. Also, as mentioned before, the agreement can come to an end if the vendor fails to satisfy any of the agreed-upon terms or conditions. Finally, another example of legal grounds weighing on the sale is if the results of an environmental report are not disclosed prior to sale. The results of such a report can weigh heavily on the sale of a property as it covers any past pollutants and land uses.

These are just a few of the reasons how a Purchase and Sale Agreement can halt, but it also shows how and why many come to an end. Both parties seek to have their best interests kept in mind, and when that doesn’t happen it can cause rifts in the agreement and eventually cause it to fail.

Top ten reasons a deal doesn’t close

1.) Buyer can’t get a mortgage / equity

2.) Mortgage money doesn’t arrive on time

3.) Unsatisfied conditions – status certificate / home inspection

4.) Open permits / work orders or other title flaw

5.) Planning act violation

6.) seller can’t discharge mortgages / liens – short sale

7.) Seller gets cold feet / change of heart

8.) Seller dies

9.) Material damage to property

10.) Lack of matrimonial consent

Buyer implications

As a buyer, you normally enter into an agreement of purchase and sale which tends to be conditional on your ability to obtain financing and/or doing a satisfactory property inspection. We realize that with multiple offers you will be required to do your due diligence in advance of an offer presentation, as your chances of winning a bidding war with a conditional offer are slim at best. A lot can happen from the time your offer is presented and accepted subject to your conditions and thereafter that will result in your agreement becoming null and void. Should this occur, there are many processes in place to get back your deposit and to return the property actively back on the market for sale.

First, let’s review what the buyer is faced with on these failed agreements of purchase and sale. Normally there is a requirement for a good faith deposit that accompanies your offer. This is essentially held in trust by the seller’s listing agent pending the termination or completion of the agreement. These funds are insured by the regulators up to fixed amounts such as $100,000, but the exact amount should be verified before providing your buyer deposit.

If you are not satisfied with the inspection report and/or fail to acquire financing, then you will be faced with aborting the purchase agreement by signing a mutual release form, which you will need to sign in order to get your buyer deposit returned. The mutual release is required to be signed by all of the parties, including the seller and agents. Should the seller feel that you did not pursue your conditions in good faith, they may not feel inclined to sign the release, in which case you would be forced to pursue the return of your monies by legal means. However, most agents will ensure that these mutual releases do get signed and executed, as the industry operates on the positive treatment of buyers and sellers. For deals where conditions go unfulfilled, the agents usually want to move on to ensure that only the successful deals do proceed, particularly since agents only get paid for their services on final completion.

Deposits

Delivery delays or errors in the deposit can also make a deal collapse. Whether the deposit is submitted “forewith”, “upon acceptance” or “otherwise agreed to in writing”, always consider business days and that time is of the essence here as well.

Amounts: Amounts must be exactly the same as in the agreement

Validity: Cheques must be valid and properly filled out

Payee:  Cheques are usually made out to the listing brokerage, but never to the salesperson. The APS may indicate that the deposit is payable to a party other than the listing brokerage, for example the Seller’s lawyer.

Receipt: The Buyer’s brokerage receiving a deposit directed to another party (listing brokerage) it must provide a receipt to the party submitting the deposit.

Deposit methods: The preferred methods include “electronic funds transfer”, “certified cheque” and “bank draft”

Delivery: It is the Buyer’s agents responsibility to ensure that the deposit is delivered to the listing brokerage immediately after receiving it from the Buyer.

Trust account

Sec. 27(1) of the Real Estate and Business Brokers Act, 2002 (the “Act”) requires a brokerage to maintain a properly designated trust account at a recognized financial institution. All trust funds must be deposited in the account of the brokerage named in the Agreement to hold the deposit. Sec. 17(1) of Regulation 567/05 (GEN) made under the Act requires that a deposit received by the brokerage who under the Agreement is to hold the deposit must be deposited in that brokerage’s real estate trust account within five business days of receipt.

A brokerage may only disburse the funds held in the real estate trust account in accordance with the terms of the trust. This is important to the purposes of the Act – consumer protection and regulation of trading in real estate. Breach of trust is an offence contrary to Sec. 27(1) of the Act; a criminal offence under the Criminal Code of Canada; and may create a civil cause of action against the trustee, i.e. the brokerage.

Brokerages as trustees of a consumer’s money have important responsibilities, including a legal duty to observe a high standard of care and to act impartially when dealing with potential beneficiaries of a trust. The proper course of action in the case of a failed Agreement is to disburse the trust money in accordance with a release or direction signed by the parties to the Agreement or pursuant to a court order. The parties to the Agreement are the seller and buyer. If the parties to the Agreement are or become involved in a court action it may be possible to arrange to have the deposit money held in trust paid into court. The advice of a lawyer may be advisable in any of these situations.

In summary, in the case of a failed transaction, a brokerage can only disburse the deposit in three circumstances:

1. In accordance with a release or direction signed by all parties to the Agreement (Mutual Release) or;

2. Upon receipt of a direction from the Court (Court Order).

3. Specific contractual terms outline how and when the deposit will be returned to the Buyer within an identified time period.

    • Example: “The Seller agrees that in the event the Buyer does not waive the conditions within the dates and times as set out in this Agreement and its amendments, the Seller and the Buyer give the Deposit Holder, the Brokerage or other Party holding the deposit an irrevocable direction to release the deposit to the Buyer and disperse the funds as soon as it is practically possible, subject to the terms of the applicable trust, without the necessity of a Mutual Release by either the Buyer or the Seller”.

REBBA – Trust Account

Section 27(1) of the Act

27. (1) Every brokerage shall,

(a) maintain in Ontario an account designated as a trust account, in,

  • (i) a bank, or an authorized foreign bank, within the meaning of section 2 of the Bank Act (Canada)
  • (ii) a loan or trust corporation, or
  • (iii) a credit union, as defined in the Credit Unions and Caisses Populaires Act, 1994;

(b) deposit into the account all money that comes into the brokerage’s hands in trust for other persons in connection with the brokerage’s business;

(c) at all times keep the money separate and apart from money belonging to the brokerage; and

(d) disburse the money only in accordance with the terms of the trust. 2004, c. 19, s. 18 (18).

REBBA – Trust Funds

Section 17 of Regulation 567/05

17. (1) If an amount of money comes into a brokerage’s hands in trust for another person in connection with the brokerage’s business, the brokerage shall deposit the amount in the trust account maintained under section 27 of the Act within the five business days.

(2) In Subsection (1), “business day” means a day that is not,

  • (a) Saturday, or
    (b) a holiday within the meaning of Subsection 29(1) of the Interpretation Act.

Seller implications

The sellers of these unsuccessful deals have to contend with the fact that their properties were reported sold conditionally on the Multiple Listing Service (MLS). During this hiatus period, it is unlikely that other buyers will consider submitting an offer. Sellers should realize that during this period they are technically off the market, waiting for their conditional buyer to firm up or then be forced to reactivate their listing to the marketplace. The fact that a condition such as an inspection is not fulfilled may cause the seller to review the report and possible deficiencies, as this could create a perceptive problem for other potential buyers afterwards who are interested in your property. The sales activity of your property on the market is fully disclosed to everyone, so conditional sales where the property gets back on MLS again may be viewed by potential buyers as having issues. You must ensure that you as a seller deal with these possible concerns and shortcomings.

The seller should make sure that their agent reruns the listing on MLS and probably have another agent’s open house to spark some renewed interest in the property. You may need to consider a price reduction, possibly less than what you sold the property for conditionally. The good news is that on conditionally reported sales on MLS, the sale price is not reported to the public, which is important because you don’t want this information being bandied about among buyer agents who might have prospects for your property.

After the failure of your conditional sale, you have to be positive and just restart the process of marketing your property for sale. Of course, exercise caution when you have a conditional offer to consider: ask yourself whether the conditions that the buyer is hoping to satisfy are realistic and reasonable. If not, let them satisfy them first and then come back to you with a firm deal, which is the best course.